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Puerto Rico Debt Crisis Splits Congress on Party Lines and Draws Muted Response From White House

Puerto Rico is struggling with more than $70 billion in debt and a sluggish economy.Credit...Dennis Rivera for The New York Times

The declaration by Puerto Rico’s governor that the island’s $72 billion in debt is “not payable” was not only a warning to its creditors. It was also aimed at leaders in Washington, who perhaps more than anyone could determine whether Puerto Rico’s finances can be stabilized or will slide into chaos.

But the federal response was relatively reserved on Monday. The White House made it clear that Puerto Rico would not receive a “federal bailout” but expressed some support for an effort to allow the island’s public corporations to use federal bankruptcy protections. As a United States commonwealth, Puerto Rico is not allowed to authorize bankruptcy, which means that impairing its debts could prove practically impossible.

But the push in Congress for Chapter 9 faces stiff opposition from many Republicans, particularly conservatives, who say that allowing Puerto Rico to restructure its debts in bankruptcy would amount to a free pass for decades of fiscal mismanagement by local government officials.

The debate could have significant ramifications for the 2016 presidential elections, particularly in the critical battleground state of Florida, which has a growing population of people who have left Puerto Rico. Many of these residents departed because of the declining economy but still have families there and stay engaged in local politics.

“My island needs help,” said Janice Lebron-Gerena, a middle school teacher, who moved to Florida from Puerto Rico a few years ago.

The most immediate effect of Gov. Alejandro García Padilla’s debt warning was felt on Monday by holders of Puerto Rico debt and the companies that insure it. The price of some Puerto Rico general obligation bonds declined as much as 12 percent, to about 68 cents on the dollar, one of their largest declines in recent months, traders and analysts said. Bond insurers’ stocks were down as much as 23 percent. 

While investors have been expecting some kind of restructuring of Puerto Rico’s debt in the coming months, the governor’s statement indicated that even general obligation bonds, whose repayment is guaranteed by the island’s constitution, could be altered.

In an interview last week, members of Mr. García Padilla’s senior staff said they would soon begin reviewing all of the island’s different forms of debt and begin reaching out to creditors about possible restructurings.

“What we are doing right now is looking at every single issuer and deciding what issuers will be approached,” said Melba Acosta Febo, president of the Government Development Bank for Puerto Rico, which oversees all of the island’s debt deals.

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Gov. Alejandro García Padilla of Puerto Rico has described the island’s $72 billion worth of bond debts as “not payable.”Credit...Ricardo Arduengo/Associated Press

One proposal under consideration by Mr. García Padilla’s team would involve creditors exchanging their current bonds for ones with more favorable terms for Puerto Rico. There has never been a restructuring of municipal bond debt on such a vast scale. Detroit, which declared the largest municipal bankruptcy in history in 2013, owed only a fraction of the debt that Puerto Rico has borrowed.

Still, the broader effect of Puerto Rico’s warning on the municipal bond market was initially muted. Prices of most municipal bonds increased, partly mirroring a rally in United States Treasury prices that was driven by the instability in Greece. Municipal bond prices often track Treasuries.

Investors said the broad gains in the municipal bond market showed that Puerto Rico’s problems, while dire, would not lead to more systemic disruptions in the $3.7 trillion market that lends money to cities and states.

“It is an overwhelmingly high-quality market,” said Hugh McGuirk, a vice president and portfolio manager at T. Rowe Price, who oversees $22 billion in municipal bond assets. “There are still so many governments doing the right things like cutting expenses and balancing budgets.”

The relative stability in the municipal market may explain some of the reluctance among federal officials to intervene more aggressively in Puerto Rico.

It has not been for a lack of trying on the part of the García Padilla administration. Puerto Rico officials and their lawyers proposed that the Treasury guarantee some of the island’s bonds to lower its borrowing costs, people briefed on the matter said. The Treasury rejected the idea, the people said.

Instead, Treasury officials have been advising Puerto Rico officials on fiscal policy and practices — which the White House said was a similar response to the federal approach to the crisis in Detroit.

“Detroit did not receive anything you could say was like a federal bailout,” the White House press secretary Josh Earnest said on Monday. “It did receive significant advice. And that did have a measurable impact on their ability to turn their problems around.”

A key difference is that Puerto Rico — unlike Detroit — doesn’t have access to Chapter 9 bankruptcy protection, which provides a legal framework for municipal governments to restructure.

Puerto Rico’s nonvoting member of the House of Representatives, Pedro Pierluisi, has sponsored a bill, the Puerto Rico Chapter 9 Uniformity Act of 2015, which would allow certain parts of the Puerto Rico government to seek bankruptcy protection.

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San Juan, Puerto RicoCredit...Ricardo Arduengo/Associated Press

The bill would let certain large public corporations on the island declare bankruptcy, allowing them to reduce debt with a current face value of about $25 billion, out of Puerto Rico’s total $72 billion of bonds. The commonwealth itself would remain excluded from bankruptcy.

One major public corporation on the island is Puerto Rico’s electric power authority, which has about $9 billion of bonds and owes a cash payment of $416 million to its bondholders on Wednesday. Other large public enterprises provide highways, drinking water, ports and telephone service on the island.

In February, the regulatory reform subcommittee of the House Judiciary Committee held a hearing on the bankruptcy bill, which Democrats uniformly supported while Republicans remained lukewarm at best.

“Bondholders purchased Puerto Rican bonds at a time when Chapter 9 was not an option,” said Representative Bob Goodlatte, the Virginia Republican who is the full Judiciary Committee chairman. “Proposals to retroactively impact investors’ rights should be reviewed with care and caution.”

Democrats said it appeared that Puerto Rico had been denied access to bankruptcy inadvertently, when the most recent amendments to the code were drafted. If Puerto Rico was excluded on purpose, they said, the reason was not clear.

Mr. Earnest said on Monday that the White House has urged Congress to consider the proposal. And a spokeswoman for the House minority leader, Nancy Pelosi of California, said in a statement, “House Republicans should bring this legislation for a vote as soon as the House is back in session.”

However much they may support extending Chapter 9 to key parts of Puerto Rico’s government, the Democrats cannot advance the legislation without Republican votes.

Puerto Rico’s financial problems may be confined to the island, but they are resonating with the roughly five million people of Puerto Rican descent living on the United States mainland. Many of the most recent migrants have settled in Central Florida, and their political influence has been growing in a state that could decide the 2016 presidential election.

Ms. Lebron-Gerena left Puerto Rico for Florida not long after she couldn’t find a job that paid enough. Her brother still works on the island as a police officer, and she worries that his pension will be cut like those of the island’s teachers.

“If a candidate would offer help, that would be very important for us in deciding who we would vote for,” she said.

Gardiner Harris contributed reporting.

A version of this article appears in print on  , Section B, Page 3 of the New York edition with the headline: Puerto Rico’s Crisis Draws Split in Congress and Muted White House Reply. Order Reprints | Today’s Paper | Subscribe

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