U.S. Treasury Secretary Jack Lew discusses Puerto Rico’s debt crisis and corporate inversion deals in an exclusive interview with Bloomberg’s Erik Schatzker at the Milken Institute Global Conference.
Lew on the need for urgent action in Puerto Rico: “Puerto Rico doesn’t have decades. Puerto Rico has a crisis today. Right now, today in Puerto Rico, you have hospitals that have laid off hundreds of workers, closed beds, closed wings. You have a Zika problem developing without the funds to come in and prevent the disease from spreading. You have schools that are closing. You have broad economic stress that’s leading people to leave the island. Almost 100,000 people left Puerto Rico last year. Let’s just be clear, there’s three and a half million American citizens, many veterans — American citizens living in Puerto Rico. If Puerto Rico doesn’t have a solution, that’s three and a half million Americans who are plunged into chaos. That’s why the need for action is so urgent.”
Lew Full Transcript:
ALIX STEEL, HOST: I’m Alix Steel.
WHAT’D YOU MISS?
Treasury Secretary Jack Lew says he is confident a deal can be reached on Puerto Rico. He does not see a spillover effect from the island commonwealth.
In an exclusive interview at the Milken Institute Global Conference just moments ago in Los Angeles, Bloomberg’s Erik Schatzker asked the Secretary about how the island would restructure its debt given recent legislative efforts in the House.
JACK LEW, TREASURY SECRETARY: Well, we have been working on a bipartisan basis between the — the Treasury Department and members of Congress trying to come up with technical approaches that work.
My standard is simple. It has to work. The restructuring has to be able to take effect. There ought to not be the ability for holdouts to stop that from taking effect. And that means it has to be a process where you put in an oversight board, you have a restructuring plan. And if a voluntary restructuring doesn’t work, there’s the ability to require a restructuring.
ERIK SCHATZKER, HOST: Of course, the devil is always in the details.
Let’s begin with the holdouts.
Have — what kind of a cram down provision would work for you?
LEW: Look, we have been clear that if there can be a voluntary agreement that everyone signs onto, that would be great.
SCHATZKER: Of course.
LEW: But the reason we have bankruptcy rules in general is that it’s really hard to have all parties agree.
We’ve seen what happens when there’s not that kind of required participation.
SCHATZKER: Look at Argentina.
LEW: Look at Argentina. It takes decades to work it through the courts. Puerto Rico doesn’t have decades. Puerto Rico has a crisis today. Right now, today in Puerto Rico, you have hospitals that have laid off hundreds of workers, closed beds, closed wings. You have a Zika problem developing without the funds to come in and prevent the disease from spreading.
You have schools that are closing. You have broad economic stress that’s leading people to leave the island. Almost 100,000 people left Puerto Rico last year.
Let’s just be clear, there’s three and a half million American citizens, many veterans — American citizens living in Puerto Rico. If Puerto Rico doesn’t have a solution, that’s three and a half million Americans who are plunged into chaos.
That’s why the need for action is so urgent.
SCHATZKER: Going back to the cram down, is one that’s common in corporate restructurings, two thirds, an appropriate level in your mind?
LEW: I’m not going to get into the specifics in — in a conversation today. We have been very clear that we are looking to have a workable approach. But it cannot be an approach where at the end of the day, as — there is not the ability to put a restructuring in place.
There are different ways to design how voluntary a process dovetails with, at the back end, something that is mandatory.
SCHATZKER: What about…
LEW: I think this can be resolved. I think that there are a number of issues out there that are hard issues. They’re not all equal. Some have to be addressed.
And I’ve been clear, I was clear in the letter that treating patients fairly is one of those issues. We’ve never said that it — it should be treated above all other obligations, but it also can’t be treated as if there’s not a need to maintain a retirement payment.
Just think about the economy of Puerto Rico. If you have a shutdown of retirement income in Puerto Rico, the macroeconomic effects are terrible for an island that’s already under stress.
Also, who’s going to keep working, paying into a retirement system when there are no benefits coming out?
It’s not a tenable outcome.
SCHATZKER: Does fair treatment of the pensions outside of the seniority include a haircut, as we saw in Detroit?
LEW: Look, a lot of the pensioners have taken a haircut already. So this is not the first round for many of the — the — the — the stakeholders.
SCHATZKER: But some people would say that the current (INAUDIBLE).
LEW: I think that there is a need to have a sustainable system. The oversight authority is being set up to balance the competing demands, the competing, you know, credit rights, the competing needs to get the economy moving.
I think you put in place an oversight structure that works, you have at the back end a restructuring. Then Puerto Rico comes back into a place where it can grow again.
Ultimately, all stakeholders, creditors included, have an interest in Puerto Rico’s economy working.
If the Puerto Rico economy continues to decline, if people continue to leave, they’re not going to have money to pay back creditors at all in some cases.
SCHATZKER: There have been difference of — differences of opinion, shall we say, about who should sit on the oversight board, what powers it should have, the building requirements, what resolutions to move forward.
What do you object to?
LEW: I think that the oversight board has to be one that is fair, that has to balance interests. There are a number of different approaches that are being discussed. I think that there are solutions to this that can be found.
If there is, in fact, as I believe there is, a desire, on a bipartisan basis, to do this in a way that’s effective, we can find a pathway there.
SCHATZKER: How do you keep it independent enough?
That board is going to have to make some awfully tough decisions.
LEW: It — look, the — we’ve seen oversight boards like this in the past. They do have an awful lot of authority, you know, and the truth is, Puerto Rico needs to have a sustainable economic future. This oversight authority can help lay the foundation for that. It can do so in a way that’s respectful of the fact that there is a governance in the commonwealth that takes — has to take the initiative.
Having that combination of a local government that takes initiative with an oversight is a package that doesn’t work.
SCHATZKER: As I understand it, the oversight panel would have the power or the authority to restructure general obligation bonds…
SCHATZKER: — and the senior cofina (ph) debt.
SCHATZKER: — know what people say about that, right?
That’s going to destroy the municipal bond market as we know