Puerto Rico Wins Deal With Mnuchin to End Impasse Over Loans
(Bloomberg) -- U.S. Treasury Secretary Steven Mnuchin struck an agreement with Puerto Rico that will speed up the island’s to access to federal disaster loans, ending an impasse over funds the bankrupt island needs to rebuild from the storm that ravaged it six months ago.
After meeting with Puerto Rico Governor Ricardo Rossello in San Juan, the two announced they reached a deal that will allow the territory to access community-disaster loans once its cash balance drops below $1.1 billion, up from a previously proposed $800 million threshold. The government had about $1.45 billion as of March 9.
Rossello in February harshly criticized Mnuchin for “recklessly” slowing the release of funds. On Thursday, he told reporters that Puerto Rico will get a portion of $4.9 billion that’s available as it’s needed.
“There’s a lot of money still to be allocated here and I think it’s going to have an enormous impact on the economy here,” Mnuchin said during a press conference. He said he plans to visit Puerto Rico quarterly to track its recovery.
The heavy damage from Hurricane Maria in September exacerbated the existing financial and economic strains on Puerto Rico, which has already been pushed into bankruptcy by more than $70 billion of debt. Thousands of residents remain without power and the island’s electric utility averted the need to impose rolling blackouts only because of a loan from the central government that was supposed to tide it over until federal money arrives.
The anticipated influx of funds for rebuilding is expected to boost the pace of the island’s economy. That’s lifted the price of Puerto Rico bonds on speculation that investors will recover more than had been expected, pushing general-obligation debt due in 2035 to more than 35 cents on the dollar from as little as 21 cents in early December.
Mnuchin took drafts of documents for the loans with him for the negotiations, which came during his first visit to the island since joining the Trump administration. He said they will be updated and “executed as quickly as possible.”
There are still some hurdles, in part because Puerto Rico is operating under bankruptcy protection from creditors who are fighting in court over the government’s cash. The loans will need to be approved by the island’s legislature, the federal board installed to oversee its finances and the bankruptcy court.
The community disaster loans are part of the package that Congress approved in October for those hit by hurricanes, including the U.S. Virgin Islands. Traditionally, about 90 to 95 percent of such loans are forgiven, though Treasury has so far said it expects Puerto Rico to repay the loan ahead of other creditors.
“There’s no reason to consider that decision today,” Mnuchin said, indicating that forgiveness was still possible, though after consulting Congress. Treasury will “address that issue and we want to make sure that the taxpayers are protected. It’s not something we are going to do for the benefit of the bondholders, but it is something we would consider down the road for the benefit of the people, if it’s needed."
While Puerto Rico’s capital has returned to a degree of normality, many businesses -- especially in more remote areas -- remain closed. Even in the capital, many street lights still don’t work at major intersections, and periodic blackouts have become expected.
Still, Mnuchin said he couldn’t be more pleased with the progress he has seen during his tour and said Puerto Rico is on the path to economic recovery.
During the meetings in San Juan on Thursday, Rossello also raised issue with the U.S.’s new tax laws. Puerto Rico officials expect a new federal tax on income from intellectual property held by U.S. manufacturers with subsidiaries on the island to hurt the manufacturing industry. Rossello is seeking alternatives to help alleviate that tax.
Mnuchin said he will consult with Congress to work out issues with the tax law.
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