March 22, 2016 / 3:26 PM / a year ago

All Puerto Rico debt needs restructuring: U.S. Treasury chief

Treasury Secretary Jack Lew testifies at a Senate Appropriations Subcommittee hearing on the FY2017 budget for the Treasury Department on Capitol Hill in Washington March 8, 2016.Joshua Roberts

WASHINGTON (Reuters) - U.S. Treasury Secretary Jack Lew said on Tuesday that Puerto Rico was "for all practical purposes" in default and needed a full restructuring of all its debt, including general obligation bonds.

"Restructuring is going to have to be inclusive of all of Puerto Rico's debt in order to address the crisis that they have," Lew said in testimony before the House Financial Services Committee.

As for the potential impact on the $3.7 trillion U.S. municipal bond market, Lew said each issue is looked upon independently based on risk and credit quality.

However, he added: "I believe the worst thing for the municipal bond market would be a disorderly unwinding in Puerto Rico, which is what will happen if Congress doesn’t act."

Puerto Rico's leaders argue that bankruptcy offers the only way to manage the tiny Caribbean island's $70 billion in debt and the U.S. Supreme Court on Monday heard arguments about whether the U.S. territory has the right to make such a move.

Republicans who control the U.S. House of Representatives have promised to soon offer a Puerto Rico rescue plan but any concrete action on the crisis is likely many weeks away. U.S. House Speaker Paul Ryan initially had promised to have a Puerto Rico rescue bill to the House floor before the end of the month.

However, Ryan told reporters at a press briefing at the Capitol on Tuesday that Republicans will not take up that plan until mid-April at the earliest. He said it will be addressed in the House Natural Resources Committee after Easter recess. Their plan would likely hand some of the thorniest creditor issues to a new, independent oversight board which does not yet exist.

Lew told lawmakers Puerto Rico faces many near-term obstacles, noting the island has "big (debt) payments due in May and July, and we don't see a path for them to be able to make those payments."

In addition to outstanding loans, Puerto Rico must confront $45 billion in unfunded pension liabilities and a 45 percent poverty rate at a time the island faces a major health crisis.

More than 20 percent of island residents could be infected this year with the mosquito-borne Zika virus, according to the U.S. Centers for Disease Control and Prevention.

Much remains unknown about Zika, including whether the virus actually causes microcephaly in babies, a condition defined by unusually small heads that can result in developmental problems.

Confronting Zika adds another costly layer to Puerto Rico's struggle to control its finances, officials have said.

Reporting by David Lawder, Patrick Rucker and Susan Cornwell; Editing by Daniel Bases and Diane Craft

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