PAC Pacific Current Group Ltd

SAN JUAN, Puerto Rico—Treasury Secretary Jacob Lew on Monday traveled to Puerto Rico for the second time this year to underscore the administration's growing concern of a large debt default this summer unless Congress intervenes.

Mr. Lew's agenda includes tours of a hospital, school and business district on the island to highlight how the migration of Puerto Ricans, who are U.S. citizens, to the mainland threatens to extend an economic recession that has lasted for most of the last decade.

Mr. Lew's primary audience is likely back in Washington, where lawmakers are completing legislation this week pushed by House Speaker Paul Ryan (R., Wis.) to allow Puerto Rico some authority to restructure its nearly $70 billion in debt. The legislation would also create a federal oversight board to ensure local compliance with balanced budget standards.

"In the absence of a restructuring, what you will end up with is a chaotic unwinding which does enormous harm to millions of Americans," Mr. Lew said last week at a conference in Los Angeles.

Puerto Rico faces a health-care crisis as reduced funding drives doctors to the mainland. Migration of working families has also accelerated in recent years, dropping the population of school-age children. The population loss has created an even steeper uphill climb for the island's business sector, which is facing higher sales taxes to help close perennial budget deficits.

In Congress, the legislation has been the product of unusually bipartisan negotiations between both parties and the Treasury Department, but it faces deep concerns from some conservative Republicans. Bondholders have objected loudly to legislation that would force them to accept upfront losses on debts that the island's government says it can't repay.

House Republicans last month scrapped a vote on the bill to make modifications after some lawmakers raised concerns that the legislation, which doesn't commit taxpayer funds, would be construed as a bailout.

Those concerns have since subsided, but conservatives have raised separate concerns that the legislation would be used to elevate the standing of pensioners ahead of bondholders. Puerto Rico not only faces a large debt load, but its pension system has more than $40 billion in unfunded obligations and is likely to exhaust its reserves later this decade.

Because Puerto Rico isn't a state, its municipalities and public corporations can't file for bankruptcy protection, and because it isn't a country, it can't seek assistance from the International Monetary Fund. Gov. Alejandro Garcí a Padilla has warned of a growing humanitarian crisis as the spread of the Zika virus tests an already strained public-health infrastructure and pinches the island's tourism sector.

Last week, Major League Baseball said it would move games scheduled for later this month between the Pittsburgh Pirates and Miami Marlins from San Juan to Miami after players on both clubs raised concerns about traveling to Puerto Rico due to Zika. "It's offensive. It's just ignorance," said Mr. Garcí a Padilla in an interview last week.

He also said the territory won't make a roughly $800 million payment on the island's general-obligation debt due July 1, which could trigger a new round of lawsuits from and between creditors who hold bonds with differing security pledges.

Treasury officials worry this will only forestall any chance of attracting private investment and boosting job growth in Puerto Rico. "The cost of delay is that you get to a point where there's nothing to restructure," said Mr. Lew last week.

Puerto Rico has been mired in a recession for a decade and borrowed heavily to balance budgets. Despite the shaky economy, investors snapped up its debt for years thanks to generous tax incentives. The borrowing spree plugged annual deficits but did little to create economic opportunity on the island.

Write to Nick Timiraos at nick.timiraos@wsj.com

(END) Dow Jones Newswires

May 09, 2016 14:15 ET (18:15 GMT)

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