By Lawrence Hurley and Nick Brown
WASHINGTON/SAN JUAN (Reuters) - As the U.S. Congress drags its feet on a bill to address Puerto Rico's $70 billion debt crisis, it could get kicked into high gear by an unlikely source: the Supreme Court.
The highest U.S. court is due to rule by the end of June on the validity of a Puerto Rico law that would allow the U.S. territory to restructure the chunk of its debt issued by public agencies, more than $20 billion, in a bankruptcy-like process.
The court fight is playing out as the Republican-led Congress grapples with legislation that lawmakers hope will prevent the need for a bailout of the territory of 3.5 million U.S. citizens.
The legislation is expected to put Puerto Rico's finances under federal oversight through a control board and let the Caribbean island cut debt through a bankruptcy-like restructuring process. It would preempt the Recovery Act, the local restructuring law that was thrown out in U.S. courts before Puerto Rico asked the Supreme Court to reinstate it.
Puerto Rico is not covered by federal bankruptcy laws that U.S. cities and public agencies can use, so some U.S. lawmakers view legislation as the only way to keep the debt crisis from worsening.
But drafting the bill has been laborious. Some bondholders, including U.S. hedge funds, and Republicans are seeking to ensure that creditors get paid as much as possible of what they are owed. Congressional Democrats, the Obama administration and Puerto Rico itself are trying to prevent austerity that could threaten services on the island.
An early draft of the bill by the House of Representatives Natural Resources Committee never made it to a vote, and the panel on Wednesday delayed unveiling the latest draft, citing the need for "a number of refinements."
Some Republicans oppose inclusion of a "cram-down" provision that would let Puerto Rico impose debt cuts on creditors who do not agree to them.
A Supreme Court decision on Puerto Rico's law could come as soon as Monday. The ruling could change the political dynamics for Republicans by resurrecting a law that is viewed as even less palatable to them than the congressional bill, according to congressional sources and experts who follow the debate.
Many of the creditors lobbying conservatives in Congress to oppose the legislation, known as the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA), would prefer to keep debt-restructuring talks out of a bankruptcy court, or at least avoid cram-down.
That is because in the normal course of business they are entitled to full repayment, but in a bankruptcy proceeding they could be legally made to accept discounts.
If the Supreme Court reinstates the Recovery Act, the congressional legislation might not seem so bad to creditors in comparison, said Melissa Jacoby, a University of North Carolina School of Law bankruptcy expert and professor. "It might alter the lobbying landscape," Jacoby said.
Puerto Rico has already defaulted on some of its debt, most recently the bulk of a $422 million payment owed by its primary government bank.
The Recovery Act, if revived, would let the island restructure debt at public utilities like power authority PREPA and water authority PRASA, though the island's legislature could try to expand it to cover other debts, Jacoby said.
The Supreme Court's March 22 oral arguments indicated the justices could uphold the law.
Such a ruling could prompt creditors and Republican lawmakers to embrace the need to pass the PROMESA bill. The legislation is expected to carry more bondholder protections than the Recovery Act, requiring an attempt at consensual restructuring talks as a condition for any debt cuts.
"Those very same players who are now blocking our (congressional) legislation will, all of a sudden, encourage the (Republican) majority to pass some legislation" if the Supreme Court revives the Recovery Act, said a Democratic House aide, speaking on condition of anonymity.
The island's moment of truth could strike by June 30. That is the date by which the Supreme Court is expected to rule and a day before Puerto Rico faces a $1.9 billion debt payment that its governor has said it cannot afford.
Congress is aiming to pass legislation to address Puerto Rico's crisis before that payment.
Steny Hoyer, the second-ranking House Democrat, told Reuters the high court’s ruling "could have some effect" on PROMESA's drafting process "depending on what the Supreme Court says about Puerto Rican authority to do whatever it needs to do."
A source close to major creditors said a ruling reinstating the Recovery Act could encourage Congress to pass legislation for a different reason: creditors would keep litigating different aspects of that law, perpetuating Puerto Rico's economic uncertainty.
Parish Braden, a spokesman for House National Resources Committee Republicans, said Congress ultimately must act regardless of what the Supreme Court does.
"The ball is already in Congress' court," Braden said.
(Reporting by Lawrence Hurley in Washington and Nick Brown in San Juan; Additional reporting by Richard Cowan in Waashington; Editing by Will Dunham)