A look at the latest twist in Puerto Rico's debt saga

Owen Stevens
May 6, 2017

Following the Title III announcement, the Ad Hoc Group of General Obligation bondholders, which holds approximately $3 billion of the island's debt, issued a strongly worded statement accusing the oversight board of sabotaging creditor talks in order to push Puerto Rico into bankruptcy.

The move comes a day after several major creditors sued Puerto Rico over defaults its bonds.

Puerto Rico, owing $73 billion to creditors, filed for a form of bankruptcy protection Wednesday.

A legal stay protecting Puerto Rico from lawsuits expired Monday night without standstill agreements with creditors in place. The request came under Title III of the PROMESA law is an in-court debt restructuring process akin to USA bankruptcy protection, as Puerto Rico is barred from traditional bankruptcy because it is a US territory. "For months, the oversight board has made every effort to sabotage consensual negotiations". In crafting the framework of a Title III proceeding, Congress expressly incorporated certain sections of the Bankruptcy Code and created a quasi-Chapter 9, which governs the adjustment of debts for United States municipalities, framework that will govern the Commonwealth's petition.

"We have sustained our position to negotiate in good faith, but before the current scenario, we choose to protect our people, " Puerto Rico Governor Ricardo Rossello said in a tweet Wednesday. The low figure alienated creditors, and negotiations toward a restructuring deal have foundered.

In the next couple of days, the chief justice of the U.S. Supreme Court is expected to appoint a federal district court judge to oversee Puerto Rico's case.

The financial crisis that has caused Puerto Rico's current problems has been decades in the making - and much of it is attributable to seven decades of US policy that gave with one hand while taking away with the other. The judge will be in charge of coming up with an orderly restructuring plan. The latest proposal would have provided as much as 90 cents on the dollar to general-obligation bondholders. The U.S. -dominated island nation faces a Medicaid funding gap of US$650 million this year, while unemployment is almost twice the average of the rate in U.S. states. The financial collapse promises to impose deep losses on bondholders who for years snapped up Puerto Rico's securities in the hope a bankruptcy wasn't a legal option for Puerto Rico. The population of Puerto Rico had declined 300,000 from 2010 to 2015's 3.4 million, according to the U.S. Census Bureau.

"Given the deficit that we have inherited, it is my responsibility to guarantee the best interests of the Puerto Rican people", Rossello said at a news conference.

Puerto Rico's situation is not dissimilar to Detroit's, which was the culmination of years of economic stagnation and bad policy. The island has been in an economic recession for about a decade and the unemployment rate is 11.5%, meaning more than one in 10 adults can't find work.

Bankruptcy will likely impact the daily lives of the people of Puerto Rico, who could face austerity measures such as cuts in pensions, worker benefits, and a reduction in health and education services. Sanchez disputed that opinion, saying that a court-supervised restructuring would actually provide more comfort to investors. The previous governor announced that the $70 billion debt load was unpayable and needed restructuring. "We can not keep stretching this chewing gum further".

Other reports by VgToday

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