For the first time in history, an American state or territory has filed for a form of bankruptcy. Puerto Rico recently filed for municipal bankruptcy in an attempt to stave off creditors and maintain essential services to its 3.4 million citizens. The debt restricting petition filed by Puerto Rico’s financial oversight board in the US District Court in Puerto Rico on Wednesday, and only includes Puerto Rico’s central government, which owes an estimated $18 billion in debt backed by the island’s constitution. More debts are likely to be pulled into the bankruptcy, or included in seperate bankruptcy proceedings, Elias Sanchez, an advisor to Governor Ricardo Rosello told Reuters. The action came just a day after several of Puerto Rico’s creditors sued the territory over defaults on its bonds.
“Given the deficit that we have inherited, it is my responsibility to guarantee the best interests of the Puerto Rican people,” Governor Ricardo Rosello stated.
Puerto Rico currently owes more than $70 billion to its creditors in public debt, and $49 billion in unfunded pension obligations. In comparison, the previous largest US public bankruptcy was when Detroit filed in 2013 for $18 billion. Analysts have praised the decision arguing it is a way to “bring the debt back to sustainable levels, protect vulnerable communities and promote transparency”.
“It will be an orderly process that should be better for creditors in the aggregate than a chatic and uncertain period involving proliferating lawsuits,” stated Moody’s Investor Services analyst Ted Hampton.
The American territory has been in an economic recession for nearly a decade, the unemployment rate is currently at 11.5 percent, and more than 45 percent of the people live below the poverty line. The financial crisis on the island was chaotic enough last year that Congress installed a Fiscal Oversight Board to take the reins. It was this week that the established board stopped trying to negotiate with creditors, leading to the filing of bankruptcy.
“If Puerto Rico were a country, it would be the 13th most indebted country in the world,” said Executive Director Eric LeCompte of Jubilee USA, an NGO that specializes in debt relief. “But this shows there really is some light at the end of the tunnel. This [bankruptcy] process is the first to deal with 100 percent of the [public] debt. It’s unique in that it may set a precedent for how sovereign debt can be renegotiated in the world.”
Because Puerto Rico is a US territory it is unable to restructure its debt as a state would, that is by invoking chapter nine of the US bankruptcy code. Instead, Puerto Rico’s bankruptcy case will be heard by a US federal judge, the first step in the insolvency process under the Puerto Rico Oversight, Management, and Economic Stability Act. The process will allow Puerto Rico the legal ability to impose substantial discounts on creditors recoveries, but could also cause concern amongst investors indirectly prolonging the island’s lack of access to debt markets.
President Donald Trump recently repeated his intention to not “bail out” Puerto Rico, a position of his stated throughout his campaign. Trump’s budget director, Mark Mulvaney, said last week that the White House pushed hard to ensure no federal dollars would be allocated toward the island’s debts in the most recent Congressional budget deal.
Declaring bankruptcy is not expected to immediately impact the day-to-day lives of Puerto Rican citizens, but can lead to future cuts in pensions and worker benefits, and a reduction in health and education services. Yesterday, the Puerto Rico Department of Education announced the island will close 179 schools, relocating an estimated 27,000 students from kindergarten through 12th grade beginning at the start of the next school year.
Some are expecting creditors to challenged the filing, arguing that the oversight board did not meet requirements established under PROMESA to conduct good faith negotiations out of court.
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