Puerto Rico's leadership crisis puts bondholders on hold

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Puerto Rico investors won't know the full impact of changes in the island's political environment until the current crisis is resolved with Gov. Ricardo Rossello's resignation effective 5 p.m. Friday.

The impact on the territory's bankruptcy reorganization and hurricane reconstruction remained in doubt on Thursday as it was still to be determined who will become the next governor.

Rossello last week succumbed to calls for him to step down following street demonstrations protesting his derogatory language in private emails that were made public.

Rossello announced Wednesday the nomination of former resident commissioner Pedro Pierluisi to fill the vacancy of secretary of state, the position next in line to become governor. By Thursday morning El Nuevo Dia and other local papers were reporting that Pierluisi didn't have the support needed for confirmation. A Puerto Rico House hearing on the nomination was scheduled for Friday and a hearing in the Senate for Monday, according to El Vocero.

The leadership vacuum is further weakening the commonwealth’s position as the Puerto Rico Financial Oversight and Management Board works toward a completion of a debt restructuring that it hopes will gain federal bankruptcy court approval next year.

Rossello has been an advocate for scaling back some of the most drastic measures contemplated by the Oversight Board, such as a reduction in public employee pensions and benefits, but the island's leadership has been paralyzed the last two weeks with calls for his resignation followed by discussion about who will replace him.

Pierluisi, who served as the commonwealth’s sole representative in Congress from 2009 through January 2017, has agreed to serve as an interim governor who will not run for election to a full term in 2020. Pierluisi earlier served as secretary of justice under Gov. Pedro Rossello, the current governor’s father.

House Majority Leader Steny Hoyer, D-Md., praised the nomination. "The people of the island deserve leaders they can trust," Hoyer said in a statement. "I believe Pedro is someone who has earned their trust through years of service, including as Resident Commissioner. In Congress, he was a strong advocate for the island and the well-being of its people."

Pierluisi has worked for law firm O’Neil & Borges since 2017. The law firm has been representing the Oversight Board in the Title III bankruptcy cases. Several observers said this background was a handicap for Pierluisi in the effort for him to become governor.

Commonwealth Senate President Thomas Rivera Schatz called a radio station earlier this week to announce that Pierluisi would not have enough votes to win confirmation in his chamber of the commonwealth’s Legislature.

If Pierluisi is not confirmed, the next in line to succeed Rossello is the Secretary of Justice Wanda Vazquez. If she declines to serve, the secretary of education would be the next in the line of succession.

The El Nuevo Día news website quoted Puerto Rico Senator Nelson Cruz Santiago as saying that Pierluisi didn’t have the votes in the Senate for approval. Cruz Santiago is in the same party as Rossello and Schatz.

Schatz is the “kingmaker,” a local political observer said. “The kingmaker wants to crown himself.”

While Schatz isn’t that popular outside of the New Progressive Party, he does hold sway within party ranks and the party controls both chambers of the Puerto Rico Legislature.

If Schatz were to become governor, there’d be a very abrasive relationship with the Oversight Board, the observer said. Schatz might question the negotiated Puerto Rico bonds’ restructuring support agreements.

Rep. Jose Serrano, D-N.Y., said Rossello's resignation makes the work harder for advocates on behalf of Puerto Rico because it makes the Trump administration and others wonder "are we just throwing money down a hole?"

"This definitely gives Trump more ammunition to continue his insults," Serrano said. "It doesn't mean he's right on what he says about Puerto Rico. Puerto Rico has some folks who will be tried and go to jail and some will resign and all kinds of things will happen. Besides that, Trump is very mean to Puerto Rico."

Only $13.6 billion of the $42.5 billion allocated to the island for hurricane disaster and reconstruction aid had been spent as of the end of May, according to the Federal Emergency Management Agency. FEMA announced last week it will require advance approval for the drawdown of any additional funds.

Three Republican members of Congress — Resident Commissioner Jenniffer Gonzalez-Colon, Sen. Rick Scott of Florida and Rep. Sean Duffy of Wisconsin — last week wrote to President Trump asking him to appoint a federal disaster coordinator to oversee the process.

Rep. Raul Grijalva, D-Ariz., who chairs the House Natural Resources Committee with jurisdiction over Puerto Rico, told The Bond Buyer he is concerned Trump might use the crisis to tighten control over aid.

“All the rumblings are that, but I don’t know it for a fact,” Grijalva said. “We have some things to do with PROMESA and we will, but it’s difficult to predict.”

Rosanna Torres, director of the Washington office of the Center for a New Economy, said Wednesday that further tightening federal oversight would produce “limited benefits.”

Torres cited research that finds “locally robust institutions as the most successful bodies in the aftermath of disasters.”

“Evoking direct federal intervention to offset undesirable behaviors oversimplifies the task at hand and, perhaps worse, disregards public sentiment,” Torres said. “There is a strong momentum to reform government institutions with a growing call for greater transparency. A successful recovery will be elusive unless there are clearly established goals and principles that guide the efforts and draw distinct lines of progress or failure.”

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