Puerto Rico turns to courts for debt protection
- Author: Joanne Flowers May 04, 2017,
May 04, 2017, 23:21
A look at the move by Puerto Rico's government to seek a form of bankruptcy protection as the U.S. Caribbean island territory struggles to emerge from a prolonged debt crisis and recession.
Chairman of the Oversight Board José Carrión said the filing was made to "provide a method for the Commonwealth and its instrumentalities to achieve fiscal responsibility and access to the capital markets, " according to a press release. America's recent spate of municipal bankruptcies has involved various state and federal laws, but Puerto Rico is not a state, so none of that hard-won precedent will apply.
Last year, Congress approved a bill called PROMESA (Spanish for "promise") to try to help Puerto Rico.
Supplementing the Petition is a "Statement of Oversight Board In Connection with PROMESA Title III Petition" (the "Statement").
Benchmark Puerto Rico general obligation bonds traded higher on Wednesday in the wake of the USA territory's filing for a form of bankruptcy protection. However, while creditors holding secured bonds may emerge relatively unscathed, those who hold unsecured bonds - wagering that Puerto Rico would remain ineligible for bankruptcy - are likely to take major hits.
"We're going to protect our people", the governor said hours after the USA territory was hit with multiple lawsuits from creditors seeking to recuperate the millions of dollars they invested in bonds issued by Puerto Rico's government, which has declared several defaults amid a 10-year recession.
"It is my hope that the Government's Title III proceedings will accelerate the negotiation process", the governor said in the statement. The filing is the largest municipal bond bankruptcy in history, and America's third largest bankruptcy, behind only the $691 billion filing by Lehman Brothers and the $328 billion bankruptcy of Washington Mutual.
"If Puerto Rico can achieve this level of debt relief through Promesa as the initial plan suggested, it will only make sense for Virgin Islands to attempt the same", Fabian said. Puerto Rico's case could show public workers and retirees that seemingly inviolate pension systems can be changed, too. Since 2007, the Commonwealth said it has seen a 14 percent decline in gross national product, a 23 percent decrease in employed persons and a 10 percent drop in population.
Almost half of Puerto Rico's residents live below the federal poverty level. And it sends Puerto Rico, whose total debt and pension obligations is $124 billion - far exceeding Detroit's $18 billion bankruptcy filing in 2013 - into unknown waters.
Puerto Rico has reached one consensual settlement with creditors, a $9 billion deal covering its public electricity monopoly that Gov. Rosselló recently renegotiated to mitigate politically unpopular fee increases on residents.
For a time, the strategy worked - but the introduction of ill-advised "Free Trade Agreements" in the 1990s caused those companies to move to low-wage countries, resulting in a high unemployment rate and a "brain drain" as Puerto Rico's best and brightest moved to the mainland, eroding the country's tax base.