This Wednesday, Puerto Rico became the first American state or territory to officially seek what is essentially bankruptcy relief in federal court. The decision comes after major creditors sued the island nation over defaults.
Chapter 9 of the US code bars Puerto Rico from traditional US municipal bankruptcy protection. Wednesday’s debt restructuring petition was filed under Title III of PROMESA, a Congressional rescue law enacted in 2016.
“It is my hope that the Government’s Title III proceedings will accelerate the negotiation process,” said Puerto Rican Governor Ricardo Rossello.
The filing begins a court-mandated process that forces bondholders to accept less than what they were promised when they bought the island’s debt. According to the filing, Puerto Rico is “unable to provide its citizens effective services” due to its massive debt.
Overall quality of life is low in Puerto Rico. Over 40% of the population lives in poverty and 11% are unemployed. The island has seen a 10% population decline over the past decade as professionals seek work elsewhere.
For those living in Puerto Rico, the bankruptcy filing could lead to cuts in worker benefits and pensions and a reduction in education and health services.
It is unclear just how much of the island’s debt will be included in the filing, but Reuters predicts it may be the “biggest bankruptcy ever in the $3.8 trillion US municipal bond market.”
The filing includes the Puerto Rican government’s $18 billion debt and may end up absorbing other debts, such as the nation’s $17 billion COFINA debt.
“Title III was especially compelled by the commonwealth’s need to restructure $49 billion of pension liabilities,” stated the Puerto Rican oversight board.
All things considered, the nation faces a staggering $123 billion in bond debt and pension obligations.
“We remain committed to holding good-faith negotiations to reach agreements with our creditors,” said Governor Rossello.
Creditors are understandably furious. They were already upset with Rossello following his March announcement of a 5-year fiscal plan that includes only $800 million per year to pay off debts. It would take $3.5 billion annually to make payments on time.
Andrew Rosenberg, a lawyer working for the general obligation bondholders, argues that the Title III filing was unnecessary and that a consensual deal could have been reached. “For months, the oversight board has made every effort to sabotage consensual negotiations,” he said. The board denies this accusation.
“The economy of Puerto Rico will be on hold for years,” continues Rosenberg. “Make no mistake: the board has chosen to turn Puerto Rico into the next Argentina.”
Susheel Kirpalani, a lawyer working for COFINA bondholders, thinks the filing was a good idea. It “enables Puerto Rico to freeze numerous lawsuits” and “maintain essential services,” she said.
Donald Trump has criticized Democrats for wanting to use taxpayer dollars to help Puerto Rico.
“Democrats are trying to bail out insurance companies from disastrous #ObamaCare, and Puerto Rico with your tax dollars. Sad!” he tweeted on April 26th.
Author’s Note: I’m not sure how this will play out, but we need to make sure that our tax money isn’t going to Puerto Rico and that this doesn’t happen again.
Of course, the US is in bad shape too thanks to Obama.