WASHINGTON- The White House on Monday dismissed the idea of bailing out Puerto Rico from its financial crisis, instead urging Congress to consider changing the law so the island can declare bankruptcy.
On the heels of a dismal economic report, Puerto Rico's governor has warned that the commonwealth can't pay its $72 billion public debt, delivering a serious blow to Puerto Rico's recession-addled economy. But White House spokesman Josh Earnest said the federal government would provide financial expertise and access to existing resources - but not a bailout.
"There's no one in the administration or in D.C. that's contemplating a federal bailout of Puerto Rico," Earnest said. "But we do remain committed to working with Puerto Rico and their leaders as they address the serious challenges."
Earnest said the Treasury Department is working with Puerto Rican officials to offer advice, and that an interagency task force would help the island identify federal programs and funds it might be able to tap into. He described that assistance as similar to what the federal government offered Detroit during its crisis. The Obama administration declined to offer Detroit a bailout, and the city declared bankruptcy under Chapter 9 of the Bankruptcy Code in 2013.
As a U.S. territory, Puerto Rico can't file for bankruptcy under that chapter, which is limited to municipalities such as Detroit. But Puerto Rican Gov. Alejandro Garcia Padilla has said he's considering asking Congress to change the law so that Puerto Rico's public agencies could declare bankruptcy under Chapter 9 - an idea that seemed to gain traction at the White House.
Economists released a critical report on Puerto Rico's economy Monday on the heels of the governor's warning that the island can't pay its $72 billion public debt.
The news that Gov. Alejandro Garcia Padilla delivered late Sunday was another jolt to the recession-gripped U.S. island, as well as a world financial system already worrying over Greece's collapsing finances.
Garcia was scheduled to air a pre-recorded televised address late Monday afternoon as legislators continue to debate a $9.8 billion budget that calls for $674 million in cuts and sets aside $1.5 billion to help pay off the debt. The budget has to be approved by Tuesday.
Anne Krueger, a former World Bank chief economist who worked on the report commissioned by Garcia's administration, presented the findings to dozens of government officials ahead of Garcia's address.
"The situation is dire, and I mean really dire," she said.
Puerto Rico's bonds were popular with U.S. mutual funds because they are triple-tax exempt, but hedge funds and distressed-debt buyers began stepping in to buy up debt as the island's economy worsened and its credit rating dropped.
Garcia's comments will likely not have much impact on Wall Street, said economist Jose Villamil, a former U.N. consultant and CEO of an economic and planning consulting firm.
"The markets are clear that Puerto Rico is heading to a direction of a restructuring or default," said the economist, adding that a voluntary restructuring by bondholders might be the best option.
"The last four administrations have kicked the can down the road," said Villamil. "At this point, there is no more can to kick. So we're going to take some very strict measures and some very profound measures. It's going to hurt, but there's no way out."
Sergio Marxuach, policy director at the Puerto Rico-based consulting group Center for the New Economy, drew parallels between the economic problems in Greece and Puerto Rico.
"If we look at how the government operates, the lack of transparency of public finances, the bad quality of statistics, the massive tax evasion, the government corruption ... it's the same in Greece like in Puerto Rico," he said. "When it comes to the magnitude of the crisis, obviously Greece is at a much more complicated and deeper level... and I hope we don't end up there."
The Greek government just shuttered banks for six business days and imposed restrictions on cash withdrawals. Greece's five-year financial crisis has sparked questions about its continued membership in the 19-nation shared euro currency and the European Union.
A report released Monday by Krueger and others found that Puerto Rico's fiscal debt is larger than originally thought and urged the government to act quickly.
"This is a daunting agenda politically, legally and organizationally. It is also an urgent one: The government's cash balances can evaporate in the face of delays, reducing the room for maneuver and intensifying the crisis," the report stated.
Puerto Rico's Secretary Treasury Juan Zaragoza acknowledged that government revenue generated this year failed to meet expectations, and said, "I'm not surprised that we have no money."
Zaragoza called for a five- to seven-year plan to tackle the island's economic problems, but said Puerto Rico wouldn't necessarily adopt all the report's recommendations.
Garcia recently confirmed that he had considered having Puerto Rico's government seek permission from the U.S. Congress to declare bankruptcy amid a nearly decade-long economic slump. His administration is pushing for the right for public agencies to file for bankruptcy under Chapter 9. Neither the agencies nor the island's government can file for bankruptcy under current U.S. rules.