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Puerto Rico Gov. Alejandro García Padilla on Wednesday signed into law a nearly one-year moratorium on debt payments, saying the move was necessary to be able to pay for basic services.
After a day of debate that lasted into the early morning hours, the Puerto Rican Senate voted Tuesday for a unilateral moratorium on all government debt payments. The House of Representatives followed suit early Wednesday.
The island has $72 billion in debts that officials say can’t be paid.
Island legislators said they took this drastic step because Congress is moving too slowly to enact their proposal to deal with the island's debt.
“Our country needs its leaders to take action and that’s exactly what we’re doing," Puerto Rico Senate President Eduardo Bhatia said after the vote.
"We’re taking action. We’re doing this as the correct step for Puerto Rico to deal with an imminent crisis. We decided we couldn’t postpone it any further and we decided to do this tonight."
The U.S. House Natural Resources Committee’s proposal allows for the island government to restructure its debt, but also seeks a federal oversight board not accountable to the island government and weakens labor rights.
The committee, which has jurisdiction over U.S. territories, is expected to take up the measure next week.
The local bill signed by the governor sets a “moratorium period” that would run through the end of January 2017, and would also set up a bank that would make some payments on a “case by case” basis during the moratorium.
García Padilla said the move was necessary to be able to pay for basic services and also pay government employees, including public school teachers.
Island residents, he said, should have priority over creditors and bondholders.
“This [moratorium] legislation is nothing new,” said Puerto Rico Attorney General César Miranda. “Other jurisdictions, such as New York, have implemented debt payment moratoriums. We could look at this as a way to put pressure on everyone to do something, including putting pressure on the government of Puerto Rico to act."
Under the law, the moratorium could be extended for several more months after January of next year. The debt would come due at the end of the moratorium, but island officials say this will give them some breathing room to re-negotiate and seek help from Washington.
Former Puerto Rico Gov. Luis Fortuño, currently a partner with the Washington law firm Steptoe & Johnson, said the debt moratorium bill was not the best way to tackle the problem.
“When I took office we had a dire economic situation, but I sat down with everyone and negotiated, and we restructured our debt in a legal and transparent way,” Fortuño said.
“I am deeply concerned with this latest move, which is one of many that are eroding the island’s credibility, not just in the marketplace but also with the business sector and shows further erosion of the rule of law,” he continued.
Fortuño noted that the bill doesn't impose a moratorium on paying legal and financial advisors.
"The government is still going to continue to pay its consultants. I’ve never seen anything like that before! It looks like consulting fees are more senior than constitutional obligations.”
Representatives of the island’s Government Development Bank (BGF) have been meeting for months with holders of Puerto Rico’s multi-billion dollar debt, floating several ideas, including an overall restructuring for all debt holders. But nothing has been agreed to yet.
The island government has also been lobbying for authority to file Chapter 9 bankruptcy as another mechanism to restructure its debt.
The island is facing several large debt payments, including $422 million on May 1st and $2 billion on July 1st. The BGF has just $562 million cash-on-hand.
Several bond holders on sued the bank Monday, seeking an injunction against the bank’s payments to other creditors and alleging that the bank favors some creditors over others, which the bank denies. BGF said it will fight the lawsuit, but called it “further evidence of the price we all pay for congressional inaction.”
Rep. Luis Gutiérrez (D-Ill.), a native of Puerto Rico, has slammed the congressional proposal.
“In Congress, the prescription for Puerto Rico’s financial problems is a new layer of colonial oversight from Washington through a control board," Gutiérrez said.
"Puerto Rico’s problems stem from too much of the power to determine her destiny residing in Washington, a far-off capital. This control board proposal just adds to those vast powers and with little transparency or authentic involvement by the Puerto Rican people.”
The Center for Individual Freedom, a conservative group based in Alexandria, Va., has been running a television ad in the Washington area opposing the congressional move, calling it “a bailout on the backs of savers on seniors.”
Meanwhile, island residents say they are worried.
“I know Congress had to do something, but this draft proposal is too drastic. It’s going backwards,” said Charlyn Gaztambide Janer, a public relations specialist in San Juan.
“We are all very scared and mad. We feel like the U.S. Congress is overreacting to what is happening on the island and we worry about what will happen.”
A poll conducted last month among island residents by Puerto Rico’s largest daily, El Nuevo Día, found that a majority — 52 percent — felt the situation on the island is “very bad,” up from 46 percent three years ago.
Nearly half — 46 percent — said they are “economically worse off” this year compared to last year, with most saying they will be either in the same economic straits or even more worse off next year.
An overwhelming majority — 73 percent — said that things on the island are going in the wrong direction, with most saying they are either somewhat or very dissatisfied with their current economic situation.
Tags Puerto Rico