Puerto Rico passes emergency law allowing a halt on debt payments

The move shields public services, pressures Congress, and may face lawsuit

Jule Pattison-Gordon | 4/14/2016, 6 a.m.

Puerto Rican Governor Alejandro García Padilla made a bold move amidst Puerto Rico’s debt crisis last week. Padilla signed a bill that declares Puerto Rico in a state of emergency and authorizes him, at his discretion, to suspend debt payments until Jan. 2017 to protect the well-being of residents.

According to the bill, Padilla may “protect the health, security and public welfare ... [by] using government funds first and foremost for public services.”

The move, some say, is sure to be challenged by hedge funds, which own much of the debt. It also cranks up the pressure on U.S. Congress to find a resolution to an economic disaster that is risking the safety of the island’s citizens.

The measure comes as Puerto Rico has been struggling to balance repayments on $72 billion of debt with the funding needs of hospitals, schools and basic public services. Meanwhile, mass emigration continues to deplete the government’s tax revenue.

Last minute scramble

Just before the law raced through the legislature, some hedge funds seemed to fear their money was slipping away.

On Monday, April 4, days before the governor signed the bill, a group of hedge funds filed a complaint with the U.S. District Court in San Juan seeking to block the Government Development Bank from spending too much to meet its next debt payment.

The complaint asked the court to prohibit the GDB from making any cash transfers not strictly necessary for basic operating expenses — such as paying bank employees’ wages — or providing public services critical to public safety. The GDB has a $422 million payment due on May 1. According to the version of the emergency declaration bill passed by the Senate on April 5, the bank has only $562 million left in cash.

Panic had risen over the solvency of the GDB, said Deepak Lamba-Nieves, research director at the Center for the New Economy in San Juan, in a phone interview with the Banner. Mayors and public officials began taking more money out of the bank to ensure they could pay suppliers and their employees, which in turn depleted what funds the bank had for paying creditors.

Lamba-Nieves said that while the hedge funds had legitimate claims to payment by GDB, if their request to halt the bank’s spending was granted, the result could be disastrous.

“Freezing [the GDB’s] accounts limits the ability of mayors and certain public officers to make payments to suppliers and pay their employees, and would trigger catastrophe at local level and in public agencies,” he said.

With the hedge funds’ complaint filed on Monday April 4, the Senate passed the emergency bill at 2:30 a.m. on Tueday. The House spent a day in heavy debate, before squeaking through on Wednesday morning a revised bill that gave the governor power to suspend payments on a case-by-case basis.

Looming lawsuit?

Angelo Falcón, president of the National Institute for Latino Policy, told the Banner that the significance of the emergency law rests in how the hedge funds respond. He noted that the Puerto Rican constitution requires the government to prioritize repaying general obligation bonds, which hedge funds may take as grounds to sue.