In Response to Rep. Maloney Question, Lew Confirms Puerto Rico Bankruptcy Authority Won’t Hurt Municipal Bond Market
WASHINGTON, D.C.— During today’s Financial Services Committee hearing, Treasury Jack Lew testified in response to a question from Congresswoman Carolyn B. Maloney (NY-12) that allowing Puerto Rico to restructure its debt would not harm the broader municipal bond market. Rep. Maloney also floated a proposal for Congress to give Puerto Rico the authority to enact its own restructuring regime. Rep. Maloney is the Ranking Member on the House Financial Services Subcommittee on Capital Markets and GSEs.
Rep. Maloney’s municipal bond market question to Secretary Lew: “Do you think that a territorial bankruptcy regime for Puerto Rico would harm the broader municipal bond market?”
“There’s an immediate crisis in Puerto Rico, it’s not a future crisis…the need for action is immediate,” said Secretary Lew in response. “In terms of the impact on other municipal bonds, three of the leading analysts have put out studies that contradict the notion that it’s going to have spillover effects on other municipal bond markets. In fact, what we know about the municipal bond market is that each issue is looked upon independently based on the risk and the quality of the credit and I believe the worst thing for the municipal bond market would be a disorderly unwinding in Puerto Rico, which is what will happen if Congress doesn’t act.”
Proposal to Give Puerto Rico Authority to Enact Own Restructuring Regime
Before questioning Secretary Lew, the Congresswoman suggested that Congress exempt Puerto Rico from the section 903 prohibition on states enacting their own municipal bankruptcy regimes. This congressional action would allow Puerto Rico to enact its own restructuring regime for all of its municipalities, addressing the issue being heard today at the Supreme Court.
“Puerto Rico does not have access to Chapter 9 bankruptcy like the other states, so we must allow for other solutions, namely allowing the territory to enact its own municipal bankruptcy codes. In 1942, the Supreme Court upheld New Jersey’s state-level municipal restructuring regime, and it was Congress that later negated this ruling with its own legislation. It is within our power to give the Puerto Rican people the tools it needs to face its financial struggles,” said Congresswoman Maloney.
Background on Puerto Rico’s Debt Crisis
Puerto Rico is currently in a severe recession. Since 2006, Puerto Rico’s economy has shrunk by more than 10%, and has shed more than 250,000 jobs. Puerto Rico’s unemployment rate is roughly 12.2%, and more than 45% of the Puerto Rico’s residents live in poverty — the highest poverty rate of any state or territory.
Puerto Rico and its municipalities have roughly $72 billion in debt outstanding, and another $43 billion in unfunded pension liabilities. Since 2006, Puerto Rico’s economy has shrunk by more than 10%, and has shed more than 250,000 jobs. Puerto Rico’s unemployment rate is currently 12.2%, and more than 45% of the Puerto Rico’s residents live in poverty — the highest poverty rate of any state or territory.
You can see the full exchange between Rep. Maloney and Secretary Lew here.