Puerto Rico will carry out a debt restructuring for seventy billion dollars according to the island’s governor Rosselló. The US government has asked to activate the bankruptcy process after the announcement of the main creditors at the beginning of the legal process regarding the cessation of payments. He also requested the US Supervisory Board to avail themselves of Title III of the Law for the Supervision, Administration and Economic Stability of Puerto Rico (known as ‘PROMESA.’) The island is experiencing an economic crisis which has becomes greater after hurricane Maria, with a poverty rate of 45%, unemployment that doubles the average of the United States and a population that keeps growing.
The governor has stated that his Administration seeks to meet creditors with a debt payment of nearly 800 million dollars annually and is expected in the Tax Plan certified by the JSF for the current year. This represents a cut of 80% in the payment of debt service originally agreed with the creditors by past administrations. Among the major creditors which filed claims with the state are hedge funds led by Aurelius Investments, which bought about 1.4 billion dollars in bonds three years ago.
Last year, the US Congress gave the territory access to a bankruptcy formula, and it was seen as a very positive progress for Puerto Rico’s situation. Months ago, the board that oversees the Puerto Rico’s finances, which directly and indirectly include some 64 billion dollars of debt, gave the green light to the legal process which could end up being complicated as much as Detroit’s in 2013 … or even more, indeed.
The fact is that Puerto Rico bankruptcy option is included in Title III of the federal bailout law of 2016. What could happen next is not easy to predict though. In exchange for this option, Puerto Rico accepted a federal oversight of its budget and finances. Title III, a hybrid between chapters nine and eleven of the United States Bankruptcy Code, paralyzes all legal claims, and, after filing creditor claims and debtor objections, the government leaves a court to decide about the payment.
The territory had raised an interesting series of ideas about the restructuring process that involves huge discounts on its obligations, but the discussions have not gone well in general. Several creditors have sued Puerto Rico during this year for defaulting on its bonds after a grace period expired under ‘PROMESA.’
The debt burden is simply unsustainable after a decade of economic recession and a growing exodus of the population to the continent. At least, beginning the judicial process includes almost fifteen million dollars of direct government debt.
Pension obligations have risen to an additional of 46 billion dollars to the general debt burden which includes Tax-binding obligations and government bonds. All together could end up being a complicated mix that would leave the bankruptcy of almost twenty billion dollars. Compared to Detroit, it is bigger in size, complexity, and number of creditors clinging to recover the maximum. It means that we are facing one of the biggest financial challenges for our country in the current times.
The orderly economic assumptions, logical assignments of losses, and forecasts presented in spreadsheets may soon become a distant memory. Puerto Rico needed the shielding of a bankruptcy option. However, such protection is not enough to keep it from haggling with its creditors. The Board of Supervision and Financial Administration for Puerto Rico created by the Congress under the bipartite Puerto Rico Oversight, Management, and Economic Stability Act has authorized the Government Development Bank for Puerto Rico to restructure its debts. Many people are very optimistic about this, but it is important to keep in mind that this is a complicated process, which, in practice, could get much worse.
Read also: Bankruptcy and debt restructuring industry: On the rise, by Suzzanne Uhland
The decision of the Supervisory Board was in response to the request of the Financial Advisory Authority and Fiscal Agency dated June 30 of the current year, in which the agency indicated that the proposed restructuring, together with certain agreements related transactions contemplated in the RSA, would result in an efficient gradual reduction and eventual closing of operations and a comprehensive financial restructuring of the obligations of the BGF.
President Trump has promised to end the huge debts of this autonomous territory some months ago although he has criticized the way Puerto Rico has managed its finances during the last years. A new debt restructuring may be needed, but that will not solve the urgency. Nevertheless, the director of the Budget Office has contradicted Trump by assuring that Puerto Rico should seek by its means to solve its debt problems.
The president spent a few hours on the island after hurricane Maria, throwing rolls of toilet paper at the villagers and praising the great work being done by the emergency teams and the federal military. About two-thirds of the supermarkets and gas stations have reopened and light returned earlier this week to the capital’s financial district, San Juan, but everyone is concerned about the financial situation.
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* Featured Image courtesy of Ricardo’s Photography at Flickr.com