Is Obama Administration Plan for Puerto Rico Debt a ‘Bailout?’

The Obama administration is proposing a plan to help Puerto Rico with its debt crisis that some Republicans refer to as a “bailout.”

Though the administration says its proposal stops short of being a direct federal bailout, it remains an open question whether a GOP-led Congress—which must co-sign any rescue plan—can get behind the administration’s plan, which some Republicans view as a bailout.

“This is a Puerto Rican crisis, which means it is an American crisis,” said the Treasury Department’s Antonio Weiss, who was the sole official to testify at a hearing Thursday before the House Committee on Natural Resources.

“Puerto Rico is already in distress. What started as recession has turned into a fiscal and liquidity crisis that shows signs of becoming a humanitarian one as well. Without action, this crisis can only escalate.”

Weiss, outlining the administration’s ideas for legislation, recommended Puerto Rico have access to a special bankruptcy-like mechanism so the island can restructure all of its debt.

He emphasized that this regime is different from Chapter 9 bankruptcy, the type of process that municipalities use.

Under federal law, while cities, villages, counties, school districts, and the like can seek bankruptcy protection, states cannot. And Puerto Rico, as a U.S. territory, is barred from getting any type of bankruptcy relief, so Congress would have to change the law to give the island the opportunity to restructure its debts.

But some Republicans are resisting any plan that they believe functions as a bailout.

On Thursday, the Republican Study Committee, a major caucus of conservatives, announced an official position that it would oppose “any congressional action forcibly restructuring debt or granting access to Chapter 9” for Puerto Rico.

Even though Weiss described “material differences” between Puerto Rico’s debt crisis and the financial troubles faced by U.S. states like Illinois or California, conservatives worry that granting the island any form of bankruptcy-like protection would encourage states to follow suit.

“I realize we are not talking about doing Chapter 9 per se, but the same principle applies to rewriting the rules after they have been agreed to and loans have been made under those rules,” said Rep. Tom McClintock, R-Calif., who spoke at the Natural Resources committee hearing.

“I am afraid the credit markets will say, ‘Wait a second, if they can do that to the Puerto Rico debt, they can do that for California and Illinois and New York,’” McClintock continued. “And as a result of this action you are proposing, I am concerned we are going to see a rapid escalation of borrowing costs for states right now that enjoy the understanding that there is a stability to the rules under which they are making these loans.”

Describing the administration’s proposed protection as tailored uniquely to Puerto Rico, Weiss said U.S. assistance should come with strong federal oversight in the form of an independent board that would monitor the island’s fiscal progress.

“We are confronted with the choice of a cascading series of defaults and intensifying litigation or an orderly framework designed by Congress under clear federal guidelines that permit the commonwealth to negotiate with all its stakeholders to emerge with a sustainable level of debts,” Weiss said. “We are proposing a legislative act customized to the unique conditions that face Puerto Rico. It is not necessarily a version of Chapter 9. It’s a pairing of oversight authorities and restructuring which will travel together.”

Weiss also talked about what he viewed as the unique struggles of Puerto Rico’s current circumstances.

He described Puerto Rico as lacking health, education, and public safety services because the government can’t pay its bills.

Fifty-five percent of Puerto Rican children are in poverty, Weiss said, while unemployment is 12.2 percent and the population has fallen 10 percent in the last decade, with many of the island’s young people fleeing to the U.S. for opportunity.

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