By Lawrence Hurley and Nick Brown
WASHINGTON/SAN JUAN, May 12 (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.
LESS PALATABLE
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.