Senate Poised to Send Puerto Rico Debt Bill to President’s Desk

Puerto Rico Nears Next Big Default
  • Lawmakers schedule final passage vote for Wednesday evening
  • President likely sign to bill before expected July 1 default

The Senate is poised to pass Wednesday evening a long-awaited bill to address Puerto Rico’s fiscal crisis, two days before the island is expected to default on a key debt payment.

Lawmakers reached agreement on the timing of the vote after the bill cleared its most significant remaining procedural hurdle earlier Wednesday in a 68-32 vote. The White House has said the president will sign the measure, which would create a financial control board to help restructure Puerto Rico’s $70 billion in debt and manage its finances.

The Senate’s action boosted the price of Puerto Rico debt and the shares of bond-insurance companies, which have guaranteed many of the island’s securities against default. Puerto Rico general obligations due in 2035, the most frequently traded security, rose to 66.4 cents on the dollar Wednesday from 65.2 cents Tuesday. Shares of MBIA Inc. rose 23 cents to $6.76, while Assured Guaranty Ltd. climbed 83 cents to $24.65.

Final passage will cap a long saga of bipartisan negotiations and odd political bedfellows that found the leaders from both parties and the White House lobbying furiously for the deal to avert what Treasury Secretary Jacob J. Lew repeatedly warned would be chaos after the island’s likely July 1 default on part of a $2 billion debt payment.

Democratic leaders backed the bill despite strong opposition from their traditional allies in labor -- who were furious about limitations on the minimum wage and overtime rules added to the package by House Republicans -- as well as concerns from Puerto Rico advocates like Senator Bob Menendez, a New Jersey Democrat who spoke for hours against the bill Tuesday night. He was calling for a chance to amend the bill to make it more favorable to the territory and ensure the island had representation on the control board.

Amending the bill would have guaranteed missing the Friday deadline, because the House isn’t in session this week.

‘Will Default’

Puerto Rico Governor Alejandro Garcia Padilla made clear Wednesday that, despite the Senate vote, the commonwealth still won’t pay bondholders on Friday.

“On July 1, 2016, Puerto Rico will default on more than $1 billion in general-obligation bonds, the island’s senior credits protected by a constitutional lien on revenues,” Garcia Padilla wrote in a editorial posted on a CNBC website. The lapse will mark the first time the U.S. territory has failed to pay what it owes on general-obligation debt.

In the end, many senators in both parties said that they were reluctantly backing the measure because the risks of not acting before the deadline were simply too high. Majority Leader Mitch McConnell’s decision to push the bill right up against the July 1 deadline also made it easier for both parties to back a measure containing provisions they oppose.

For a QuickTake on Puerto Rico’s debt woes, click here

Before the vote, senators were worried there was little room for margin.

"It’ll be close," said Dick Durbin of Illinois, the No. 2 Democrat in the Senate.

But McConnell of Kentucky said he was working hard to make sure that most of his caucus would back the legislation, S. 2328.

One last-minute wrinkle that complicated the final push was an effort by a bipartisan group of senators, led by Democrat Joe Manchin of West Virginia and Republican Rob Portman of Ohio, to secure a vote on a mining pension bill by holding the Puerto Rico bill hostage.

Some conservatives were also unhappy that the bill doesn’t demand enough austerity from the Puerto Rican government, blaming years of fiscal mismanagement for the island’s unaffordable debt load. Judiciary Chairman Chuck Grassley of Iowa said the measure wouldn’t do enough to prevent a taxpayer bailout a few years from now. 

The legislation does not contain any new federal funding, but it would create a path forward to address the island’s crippled finances. The commonwealth racked up $70 billion in debt during years of borrowing to cover operating costs.

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