WASHINGTON — The federal government is closely monitoring the deteriorating fiscal health of Puerto Rico and is considering ways it might assist the struggling commonwealth, an effort complicated by political headwinds and the unique status of U.S. territories and their bonds, according to sources familiar with the matter
The U.S. Treasury and the president’s Council of Economic Advisers have been tracking Puerto Rico, which experienced a drop in its bond prices through late summer and is now facing the very real prospect of limited market access, they said.
Also watching the territory is the President’s Task Force on Puerto Rico, which is made up of almost 20 officials from various federal agencies.
The concerns stem from the island’s financial troubles, which have led to a series of rating downgrades. Moody’s Investors Service cut its rating on Puerto Rico’s general obligation bonds to Baa3 from Baa1 in December. Standard & Poor’s and Fitch Ratings cut their credit ratings on the debt to BBB-minus from BBB, and to BBB-minus from BBB-plus, respectively. The ratings are hovering one notch above non-investment-grade.
The island is reported to have around $70 billion of debt outstanding. It has about 3.7 million residents, or about $18,919 of debt per person, but suffers from a poverty rate of 45%, double that of Mississippi, according to the Census Bureau.
“The President’s Task Force on Puerto Rico has been working for a number of years to maximize the impact of federal resources on the island,” a senior administration official who did not want to be identified said Wednesday.
“As part of its ongoing work, the task force is coordinating with federal agencies to strengthen Puerto Rico’s fiscal situation and economic outlook,” the official said “To that end, the task force is working closely with Gov. Garcia Padilla’s administration to make sure that federal resources are fully utilized for maximum impact for the people of Puerto Rico.”
Commonwealth officials also downplayed the possibility of federal intervention to either guarantee or purchase Puerto Rico bonds, which are very widely held because they enjoy tax-exempt status in every U.S. state. Puerto Rican officials characterize talks between themselves and the Treasury as being more general discussions of the island’s economic outlook and progress.
“We have no knowledge of a plan for Treasury to buy Puerto Rico bonds,” said Melba Acosta Febo, secretary of the treasury and chief public financial officer of Puerto Rico. “In the normal course of business, we maintain an ongoing dialogue with Treasury on a range of issues. In the current environment, these discussions include updates on our fiscal and economic plans and progress, as well as how we are responding to changing market conditions.”
But sources who closely monitor the distressed territory said the commonwealth could be inching toward more concrete action in an effort to head off a fiscal collapse that could send shock waves through the municipal market.
Recent market trends make clear that some investors have become spooked by the island’s financial struggles, and observers suspect the federal government understands that Puerto Rico could reach a crisis point where it loses access to the market but desperately needs to
One source said the White House and Treasury have kicked around the “hypothetical” scenario of providing debt assistance to Puerto Rico.
The source cautioned that while such informal discussions have occurred, it does not mean that the government will ultimately act on them.
The current U.S. government shutdown has likely put such discussions between federal officials on hold, the source added.
“Puerto Rico officials have raised it with them, more in the context of background and wanting other measures that would benefit the territory than direct help regarding insular debt,” said the source. “Federal officials have discussed what could be done, including with others, but that doesn’t mean that they are really considering taking the special measures that a couple of people have suggested.”
But Treasury officials said Thursday that they haven’t participated in any discussions and are not planning to provide any debt assistance to Puerto Rico.
Puerto Rico is treated like a state for the purposes of bankruptcy law, meaning that federal law does not allow it to seek relief from its debts by filing for bankruptcy and reorganizing, as Detroit is attempting to do. Unlike U.S. states, however, Puerto Rico has little ability to speak for itself at the federal level. Like other territories and the District of Columbia, Puerto Rico has only one “representative” in Congress, and he is not able to vote on the House floor. Puerto Rico has no Senate representation.
The White House sees monitoring and aiding the territories as a special responsibility of the president, sources said.
Robert Donahue, managing director at Municipal Market Advisors, said the U.S. government is likely bracing for the “worst-case scenario” in Puerto Rico. Donahue said it is not clear how close Puerto Rico is to losing its investment-grade status and affordable access to the market, but warned if that does happen more drastic measures would probably be necessary.
“If market access were to go away, Puerto Rico would need to take an extraordinary step,” he said.
Unlike Detroit and other municipalities, investors holding Puerto Rico debt in a default scenario would face an extremely unclear path.
The 11th amendment to the U.S. Constitution prevents citizens from suing sovereign states. Donahue said it is also an open question as to which type of Puerto Rico debt would be the most secure in that scenario.
The source said Puerto Rico itself would likely attempt more serious self-help before a federal intervention. There would likely be little popular appetite for action that would amount to an expansive bailout of Puerto Rico, the source said.
“There is more that the government of Puerto Rico can do, including communicate better,” the source said. “They are still trying to buy time and hoping for calmer assessments of the situation. I think that they will take some other budgetary measures if they have to, as they probably will.”