Orderly Restructuring Vital for Puerto Rico’s People, Lew Says

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BEVERLY HILLS, Calif. — U.S. Treasury Secretary Jack Lew said concern for the people of Puerto Rico is the main reason he wants lawmakers to adopt restructuring legislation for the commonwealth.

Investors have already adjusted their portfolios to take into account the risk of holding Puerto Rico bonds, but the “crisis for the people of Puerto Rico is immediate and it is real,” Lew said here Tuesday at the Milken Institute Global conference.

“If you look at Puerto Rico, it is a crisis that has been happening for years,” Lew said.

Lew added, his concern is that it will go beyond the government closing down hospital wings to an inability to provide police services.

“Puerto Rico is a U.S. territory – and as Americans they expect a certain level of service,” he said.

Over the past year, 100,000 people have left Puerto Rico for the mainland.

“The challenge is for Congress to act fast enough that the enfolding crisis in Puerto Rico does not get out of control,” Lew said. “That has a larger impact than the market as a whole.”

Puerto Rico has been in trouble for a while and it has not spilled over to other issuers in the bond market, he said.

Lew noted that Monday’s news of defaults by Puerto Rico had a mild effect on bond yields.

A solution is needed in order for Puerto Rico to have an economy in the future, he said.

“All the stakeholders have an interest in wanting to get Puerto Rico back on track,” he said.

Lew added that his concern is if the restructuring isn’t effective the U.S. government will have to bail out the territory.

When other municipalities are insolvent, they have the ability to restructure, but that does not exist for Puerto Rico, Lew said.

The legislation he would like to see is something that allows the government there to restructure and to make sure that restructuring is fair for all of the stakeholders.

“If you get to a point where restructuring can’t work, then you have a bailout,” Lew said.

The U.S. territory is in a league of its own with $70 billion of outstanding debt.

“The goal has to be that Puerto Rico comes out of this with a sound way to access the markets,” Lew said. “Puerto Rico needs to adhere to the commitments it made to citizens in terms of its tax policies.”

All stakeholders have interest in there being a strong oversight function, he said.

“I think many of the creditors would see restructuring has a useful function,” he said. “There are others who want to maximize their chance of getting a dollar on a dollar. That is why you need to have a restructuring process.”

If the fate of the debt devolves into litigation, Lew said, bondholders will be fighting over it for 10 years.

If that happens, he said, “there won’t be anything left of Puerto Rico.”

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