Treasury urges Congress to act to avoid “cascading defaults” in Puerto Rico

U.S. Treasury Secretary Jack Lew warned Congress on Monday of the risk of “cascading defaults” by the Puerto Rican government if lawmakers do not approve legislation on restructuring the island’s $72 billion debt.

“With no orderly restructuring framework to address its debts, Puerto Rico will face a series of cascading defaults” and lawsuits on the matter will multiply and take years to resolve, Lew said in letter to Congressional leaders.

“Unless Congress passes legislation that includes appropriate restructuring and oversight tools, a taxpayerfunded bailout may become the only legislative course available to address an escalating crisis,” he wrote.

On Sunday, Puerto Rican Gov. Alejandro Garcia Padilla announced his decision to apply for a unilateral moratorium on the payment of the $422 million in Government Development Bank debt that came due over the weekend, adding on Monday that the island also does not have the money to pay some $2 billion in obligations with a due date of July 1.

That amount includes some $700 million in what are known as General Obligation bonds, which are guaranteed by Puerto Rico’s constitution.

The No. 2 lawmaker in the House, Republican Kevin McCarthy, said last week that he expects a legislative proposal to be crafted before July 1.

The Puerto Rican government owes $72 billion, which it considers to be “unpayable” given the acute economic crisis on the Caribbean island, with its 3.5 million residents.

Since Puerto Rico is a U.S. commonwealth and not a bona fide state it may not rely on protection under Chapter 9 of the Bankruptcy Law, although Garcia Padilla has urgently requested an exemption so that the island’s debt may be restructured. That request has been rejected by the Republicans, who control both chambers of Congress.

Puerto Rico has been mired in recession for nine years, a situation that has resulted in a huge emigration of residents to the continental United States.