House members left Washington Friday for a week-long recess without taking action on a fiscal rescue for Puerto Rico, days before the territory’s development bank is set to default on a payment to bondholders and deepen the economic crisis there.
The Government Development Bank has said it would default on nearly $390 million due May 1, a move that could unleash a cascade of problems throughout the Puerto Rican financial system.
The GDB, which acts as bank, adviser and fiscal agent to the Puerto Rican commonwealth, is essentially the checking account where municipalities deposit and withdraw money. The commonwealth’s treasury has already transferred its money from the GDB to private banks. Bondholders are likely on Monday to ask a federal court to freeze the GDB’s assets, which could halt payments, at least temporarily, to suppliers and public servants and paralyze municipalities.
Puerto Rican credit unions, which hold about 20 percent of GDB’s $5 billion in bonds, fear the equivalent of a run on the banks and have been trying to calm their mostly middle- class depositors. Several agreed Friday to exchange $33 million of bonds due Sunday for new ones due a year later.
“We are not vultures,” the Movement of Savings and Credit Cooperatives said in an ad printed in El Nuevo Dia on April 25, vowing, “In good times and in bad, always with Puerto Rico!” Earlier in April, two cooperatives took out an ad with a sunrise photo. “Puerto Rico shall have a new dawn and the cooperatives will be there investing in the reconstruction of our beloved island,” it said.
Congress has focused on a July 1 deadline, when the commonwealth and its agencies are likely to default on another $2 billion of principal and interest, including $800 million for general obligation bonds, generally the safest.
“Most people think July 1 is atomic bomb day,” said Sergio Marxuach, public policy director of the Center for a New Economy in Puerto Rico. “May 1 is still significant.”
Meanwhile, the impasse on Capitol Hill has come down to one politically loaded word — “bailout.” Opponents of the current House draft of a rescue plan, which could ultimately give a judge the power to reduce the island’s $72 billion in public debt, are trying to lump it in with the bank, insurance and auto industry rescues during the 2008-2009 economic crisis.
Leaders of both parties who have tried to forge a consensus in Congress have bristled at the characterization, noting that the draft legislation does not authorize any taxpayer dollars for the island.
Rep. Rob Bishop (R-Utah), chairman of the House Natural Resources Committee, which is crafting the bill, called the use of the word “cynical and disingenuous.”
“For me, I think to any human being, ‘bailout’ means you’re going to get money to solve your problem,” he said. But Puerto Rico is not getting any money as part of the deal, he said. “So to say it’s a bailout, it’s obviously not just a stretch of the meaning of the word, there has to [be] an ulterior motive.”
But there are signs that the “B-word” is beginning to stick — particularly among a cadre of conservative House Republicans — thanks in large part to the efforts of outside advocacy groups and bondholder lobbyists that have been opposing the rescue bill.
A group called the Center for Individual Freedom has spent millions of dollars on ads calling the Puerto Rico bill a “bailout,” targeting specific congressional districts, including Bishop’s. Jeff Mazzella, CFIF’s president, did not reply to email or phone calls Friday. The group does not disclose its donors, but there is a widespread belief on Capitol Hill that the group is acting at the behest of those bondholders opposed to a court or board-imposed restructuring.
“The bottom line is that people who are bottom-feeders and bought bonds at really cheap prices now want to maximize their profit off of the backs of people in Puerto Rico,” said Sen. Robert Menendez (D-N.J.).
Behind the scenes, a prominent lobbyist for some of those bondholders, former Florida congressman Connie Mack IV, has repeatedly referred to the bill as a “bailout” in private emails and public statements. “The #puertorico bill a #bailout by every measure,” he tweeted on April 20. “Taxpayers, retirees on the hook 4 Puerto Rico’s liberal policies.”
Bishop unveiled a new draft of the rescue bill, which would give Puerto Rico access to a court-enforced debt restructuring in exchange for the imposition of a federal fiscal oversight board, and House leaders hoped to pass it last week. But the bill has not yet emerged from committee — due in part to Democratic objections, but also to balking conservatives.
Supporters of a congressional rescue plan got a boost on Tuesday, when Pimco, which manages $40 billion of municipal bonds, supported the current House bill.
“It would be incorrect to classify [the bill] as a ‘bailout,’” said a blog posting on the Pimco website. “No incremental federal tax dollars are allocated to the Territory under the bill. In fact, if this legislation does not advance, the probability of future federal tax dollars flowing to the Territory or bondholders may actually increase.”
Pimco said it does not hold any Puerto Rico bonds.
Rep. John Fleming (R-La.), a Natural Resources member who opposes the bill, said if Bishop could have gotten the bill out of committee with Republican votes, “he would have already done it.”
“I don’t think bailouts are popular among the American people,” he said. “The stimulus package, the bailout of the automobile companies, the bailout of the banks — none of that was popular with taxpayers. . . . If the speaker gets a majority of Democrats to pass a bailout for Puerto Rico, I think that would be a political disaster.”
Fleming, who is running for U.S. Senate, said it was “absolutely” fair to call the Puerto Rico bill a bailout: “Just to go in there and manhandle this ourselves, what we’re going to end up with is mission creep, bailouts, and ultimately other states like Illinois and California who are also going down this pathway — they will see this as a solution to their problems as well.”
House Speaker Paul D. Ryan (R-Wis.) has sought to counter the messaging, inviting House members to a closed-door policy briefing on the issue earlier this month and publicly denouncing the bailout talk on several occasions.
“There will no taxpayer bailout,” he told reporters earlier this month, blaming “big-money interest groups on Wall Street” for the perception.
Democrats, meanwhile, are showing signs of exasperation as they watch GOP infighting threaten a major legislative priority.
“They can’t pass a bill with just Republican votes, because there’s a group on the hard right who say, ‘Do nothing, just pay off the bondholders,’ ” said Sen. Charles E. Schumer (D-N.Y.). “They are unwilling to go to [Minority Leader Nancy] Pelosi [D-Calif.] and get Democratic votes because that would alienate the hard right. . . . That’s the bind America is in, that the Republican Party is sort of tied in a knot between their mainstream conservatives and their hard right, and they can’t come to an agreement.”
Adding to the exasperation is what they consider the irony of financial speculators decrying “bailouts” less than a decade after Congress kept Wall Street afloat.
“Most of the people that benefit from doing nothing are the same people that caused the situation,” said Rep. Raúl M. Grijalva (Ariz.), the ranking Democrat on the Natural Resources Committee. “The speculator class is in charge of the opposition, and unfortunately the Republicans are biting and taking it as fact.”
But Democrats are facing pressures of their own — from territorial officials who are nervous about the powers of the oversight board, and from labor unions who want protection for pensioners who could take a back seat and suffer cuts of their own in a restructuring.
With the May default all but certain and the even bigger July default looming, Bishop said that advocates for the island need to redouble their efforts to convince lawmakers to act.
“They can’t just sit back and expect it to be solved for them,” he said. “They have to actually say something about the situation so people understand the significance of where we’re going. . . . Brilliant as I am, I can’t do it by myself.”