Treasury presses Congress to help Puerto Rico, but faces tough sell

By Nick Brown and Megan Davies SAN JUAN/NEW YORK (Reuters) - The Obama administration is turning up the heat on U.S. lawmakers to help Puerto Rico out of its worsening debt crisis, but it is facing heavy resistance from the Republican-controlled Congress. The U.S. Treasury on Wednesday released a list of proposals it wants Congress to enact to help the U.S. territory, such as healthcare funding measures, and tax and bankruptcy legislation. Yet without bipartisan support in Congress, Treasury is limited in what it can achieve, and anything that smells like a bailout for the island, struggling with $72 billion debt, is unlikely to get support. "We need to bring the U.S. government to the table," said former Puerto Rico Governor Anibal Acevedo Vila. "There's no way we can get out of this crisis if they don't come to the table. We're not begging for help but they have responsibility also." A sun-kissed Caribbean island that lures investors with tax-exempt bonds, Puerto Rico is buckling under the debt burden while 45 percent of its citizens live in poverty. With bondholders resisting proposals to reduce the principal and interest on their debt holdings, and political gridlock threatening spending reforms proposed by Governor Alejandro Garcia Padilla, the territory has said it will run out of cash by next June. Some Democratic lawmakers met with Puerto Rican leaders in Orlando, Florida last week, and vowed to lobby President Barack Obama's administration to provide more help to the island of 3.5 million. U.S. Treasury Secretary Jack Lew and counselor Antonio Weiss met with interest groups on Monday, while Weiss will testify at Thursday's hearing on Puerto Rico before the U.S. Senate Committee on Energy and Natural Resources. Yet a bill to extend bankruptcy protections to Puerto Rico by giving it the option of filing under Chapter 9 of the bankruptcy code has made little headway. And neither has a bill that would improve the island's federal healthcare funding. Critics complain that Puerto Rico receives far less in federal Medicaid funding than it would if it were a state and that it deserves to be on an equal footing. Treasury's proposal calls for legislation to close the gap. SUPER CHAPTER 9 Meanwhile, the island does not have access to Chapter 9, which governs municipal insolvencies and allows public entities like cites, towns and agencies to file for bankruptcy. While legislation is pending to extend Chapter 9 to Puerto Rico's municipalities and public agencies, Treasury's proposal would go a step further, by allowing the island itself to file for bankruptcy. "With the escalating crisis, bankruptcy protection is now needed for the Commonwealth as well," Treasury said in a 10-page proposal. Treasury's support for co-called "Super Chapter 9" is surprising because, while the idea has been championed by some Puerto Rico advocates in Congress, it is seen as more radical than extending Chapter 9 protections. Congress has shown little appetite for supporting existing bills on bankruptcy or healthcare. While both have received numerous Democratic co-sponsors, powerful Senate Finance Committee Chairman Orrin Hatch, a Republican, warned there could be no help for Puerto Rico without better financial disclosure, and expressed doubts about extending bankruptcy protection. Hatch said in a statement on Wednesday that before Congress provides an approach for Puerto Rico "we must first ‎thoroughly ‎examine its financial health." "I’m afraid proposals that aim to solve this multi-faceted problem by expanding entitlement programs and tax credits at the costs of billions of federal taxpayer dollars will be sorely disappointed," Hatch said. "The issues facing Puerto Rico are far too complex for such simplified solutions." U.S. Senator Bill Nelson, a Florida Democrat, said a bill could get passed by being attached to broader legislation, although it would be an uphill battle given the stalemate in Washington. DEAL FAILURE Weiss' appearance on Thursday could help give some credibility to the embattled territory but whether Treasury can help Puerto Rico restructure its debt is less certain. "The Treasury has limited flexibility when it comes to intervening in financial markets without an act of Congress," said Robert Jackson, a professor at Columbia Law School and former adviser at Treasury. "Treasury would have to go in less as a provider of capital and more as a provider of advice and guidance." Jackson said the U.S. Federal Reserve could under certain circumstances use its bond-buying authority to buy municipal bonds, but that such a scenario was very unlikely. Puerto Rico has been trying to persuade different investor groups to sign on to deals to restructure debt. But on Wednesday, the Government Development Bank said it had failed to come to a deal with creditors. The island's authorities have also yet to persuade bond insurers of its power utility PREPA to sign onto a deal reached with bondholders. The island's government is instead pushing for a comprehensive voluntary exchange offer, it said in a statement on Wednesday. Such an offer, or so-called 'superbond,' could exchange just one credit for various existing bonds, possibly depending on the ranking of those credits, said a source familiar with the situation. The Wall Street Journal last week reported that Treasury was considering administering this bond. A source familiar with the matter said a superbond was among many options Treasury has looked at. However, Treasury said publicly it would not "undertake" any of Puerto Rico’s debt, and Weiss told some Democratic Senate staffers in a meeting last week that there would be no such move, according to congressional sources. A separate source familiar with the matter also said a Treasury superbond was not on the table. (Reporting by Megan Davies; Editing by Martin Howell)