Puerto Rico, whose government admitted in 2015 that the island could not meet its debts, has filed for a US$70bn debt restructuring in what could become the biggest-ever municipal bankruptcy filing in the US.
The amount owed to creditors far surpasses the US$18bn owed by Detroit, which in 2013 was then an all-time record and could trigger the biggest bankruptcy to date in the $3.8 trillion US municipal bond market.
However, it has not been confirmed how much of Puerto Rico’s US$70bn debt load is to be included in the bankruptcy filing, which came a day after several major creditors sued Puerto Rico over defaults on its bonds.
The Economist magazine reports that something akin to bankruptcy is possible due due to a US federal law passed in 2016 and known as the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA). Until then, the island’s legal status as a territory afforded it no relief from its debts, although were Puerto Rico a state, its public utilities could have declared bankruptcy.
The law established a “financial oversight board”, appointed in Washington, tasked with reaching a deal with bondholders, while also allowing for bankruptcy-like proceedings should negotiations fail.
Credit ratings agency Moody’s commented that the decision to invoke Title III under PROMESA, which allows for a court debt restructuring process similar to US bankruptcy protection marked “a positive step” for bondholders overall, as an orderly process should be “better for creditors in aggregate than a chaotic and uncertain period.”
Puerto Rico’s economy was in recession even before the 2008 global financial crisis struck, its unemployment rate is around 11% and the population has fallen by about 10% in the past decade. As Puerto Ricans are US citizens, its taxpayers can avoid austerity by moving to the mainland and further reducing tax revenues. Of those remaining, an estimated 45% live in poverty.
The bankruptcy process provides Puerto Rico with the legal ability to impose drastic discounts on creditor recoveries, but threatens to unsettle investors and prolong the island’s lack of access to debt markets.
Previously, the record US public bankruptcy had been that of Detroit in 2013, which covered around US$18bn in debt. The city was able to reach an agreed debt restructuring with stakeholders, helped by soliciting generous contributions from philanthropic foundations that removed pressures to sell the city’s art collection.
The Puerto Rican government’s latest fiscal plan, approved in March, aims to balance the budget over three years by imposing further austerity cutbacks of around 10%. However, it provided modest additional funding for the island’s Medicaid programme, which provides health insurance for the poor.
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