- - Wednesday, April 13, 2016

ANALYSIS/OPINION:

With each passing day, the debate over Puerto Rico’s economic future begins to mirror the recent Argentinian debt crisis and similar distressed situations where creditors obstructed progress at the expense of ordinary people. The cost of inaction continues to take its toll on the commonwealth as economic contraction sets in, population outflows rise and the island’s fiscal fire steadily spreads.

The public policy dialogue over Puerto Rico’s burdensome debt has devolved along similar lines in recent months. Competing junior creditors have been pulling in different directions, pushing contradictory arguments that make reaching a constructive resolution increasingly difficult.

However, the House Committee on Natural Resources finally released its legislation this week. Unfortunately, many general obligation (GO) bondholders immediately threw cold water on the legislative framework. They implied it was an iteration of Chapter 9.

In reality, the legislation provides for a precedent-based compilation of bankruptcy protocols and procedures only available to the commonwealth under the Territorial Clause of the U.S. Constitution.

Obviously, not all bondholders have the same “skin in the game,” but the time has come for those lobbying Congress to collectively agree on core legislative principles that are necessary for any successful financial restructuring. Puerto Rico’s looming debt payments and the tight congressional calendar should be bringing all sides closer to a solution based on their legal rights.

The legislation produced by Chairman Rob Bishop of Utah and his committee’s staff includes several pillars that should be preserved moving forward, but five are particularly paramount.

The first principle is a bill must provide for a restructuring regime that is limited to U.S. territories. Congress has a unique constitutional responsibility to Puerto Rico under the Territorial Clause, by which the commonwealth holds status that is quite different from the states, as is evident from decades of federal legislation over Puerto Rico’s debt capacity. Focusing on this history helps address fears about state-level contagion and related myths.

The second essential principle is all creditors must take part in any solution. Successful restructurings are based on global compromises that require universal participation. Excluding select groups — such as hedge funds that purchased high-yield GO bonds — will lead to constitutional challenges and litigation that delays on-island relief. The GO bondholders’ demands to be excluded from a restructuring regime is completely self-serving and untenable based on their legal standing relative to secured creditors.

Third, a bill must establish federal fiscal oversight. Any credible policy solution must include the establishment of an oversight body to assist in creating fiscal plans, promoting growth initiatives, curtailing expenditures and reducing debt service to sustainable levels.

Fourth, policymakers must limit restructurings to territories and their instrumentalities that are truly insolvent. Insolvency has always been a requirement for municipal bankruptcies entering a restructuring. Any new law should rely on well-established precedents and market expectations that a debt issuer will pay its obligations when able to do so, and only seek a restructuring when it cannot because of insolvency.

Lastly, the bill should encourage voluntary agreements among debt issuers and creditors. Keeping the Voluntary Agreements Certification enables creditors groups to continue advancing proposals and head off “cram downs” well in advance of a control board’s action. The truth is, though, that any successful debt overhaul typically needs to have this hammer in its tool box to facilitate good-faith negotiations.

With House leadership looking to have a bill marked up as soon as Thursday, now is the time for creditors to coalesce around these constructive principles. Agreeing on a foundation will make it easier to confer on technical details as solutions evolve and a responsible fiscal oversight board gets to work.

Judd Gregg is a former Republican member of the U.S. Senate from New Hampshire who served as chairman of the Senate Budget Committee and later served on the National Commission on Fiscal Responsibility and Reform.

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