Could Bankruptcy Be The Solution For Puerto Rico?

by | Sep 10, 2015 | World Featured

The financial state of Puerto Rico has been a recent headline in the news. As the commonwealth faces financial uncertainty, many are watching Puerto Rico as it becomes known as “America’s Greece.” Most recently, the island announced it would be unable to make scheduled loan payments, further fueling speculation of a financial collapse. Puerto Rico’s Public Finance Corporation has defaulted on a $628,000 payment towards a bill of $58 million. The island is facing more than $70 billion worth of composite debt. While the Public Finance Corporation will make a partial payment, Moody’s Vice President Emily Raimes explains why it is still counted as a default on the loan.

“This event is consistent with our belief that Puerto Rico does not have the resources to make all of its forthcoming debt payments.  This is a first in what we believe will be broad default on commonwealth debt,” the bond rating firm vice president said.

Puerto Rico is in a unique situation when it comes to how to deal with their financial woes. As an American commonwealth, the citizens are given automatic American citizenship, however the island does not get certain benefits as an American state would. While the issue of granting Puerto Rico statehood status has been widely debated, most Puerto Ricans accept the island’s current commonwealth status. However, rising debt is making this more of an issue. Puerto Rico owes more than $70 billion to creditors. Island officials have even stated that the Puerto Rico’s budget deficit is somewhere around $700 million. Put into layman’s terms, this amounts to about $20,000 per resident. This figure is 15 times more than all 50 states on a per capita basis. According to Moody’s, this debt is only going to increase. It is projected to reach around $40,000 in just under 10 years.

Despite its lack of statehood status, the American public might still have to cover the unpaid debt. Financial experts explain that many American municipal bond funds are invested in Puerto Rican bonds because of the exemption from federal, state and local taxes. However, the lack of taxing Puerto Rican citizen’s incomes has led to a decade-long recession. Unemployment rates are soaring, housing prices are diving and many rely on food stamps. This dire situation has led to a massive migration of many to come live in the mainland. According to the Pew Research Center, more than three-fifths of all Puerto Ricans have moved to mainland America.

The island’s officials are looking for ways to help fix the impending crisis. Puerto Rico’s governor, Alejandro Garcia Padilla has even stated that the debt is unpayable and pleaded for the public’s help during a televised speech:

“Those who want the support of Puerto Ricans must help Puerto Rico now…not in a few months during the elections. We cannot allow the heavy weight of the debt to bring us to our knees…This is not about politics.  It’s about math.”

The pressure has been felt in Washington. While the White House has said it does not support directly bailing out the commonwealth, many lawmakers are fighting for a more indirect method. Several senators believe treating Puerto Rico as a de facto state would help the island bypass a federal law that barred it from declaring bankruptcy. Written by Senators Richard Blumenthal (D-Conn.) and Charles Schumer (D-N.Y.), the Puerto Rico Chapter 9 Uniformity Act would allow Puerto Rico to protect themselves from creditors by restructuring their debt. Proponents of the bill are quick to explain that the bill is not a ‘bailout’ but a way to protect Puerto Rico. The lawmakers released a prepared statement explaining their efforts:

“H.R. 870 does not require the federal government to spend a single dollar. It would simply grant the government of Puerto Rico a power that all state governments have, namely the ability to authorize one or more of its insolvent public enterprises to work out a path forward with its creditors under the supervision of a federal bankruptcy judge based on federal substantive and procedural law…The alternative is a legal no man’s land that benefits neither Puerto Rico nor those who have loaned the territory money.”

While attractive, it does seem like Chapter 9 bankruptcy could be Puerto Rico’s only chance at surviving this financial crisis. American bankruptcy attorneys explain how this filing will not only allow Puerto Rico a much-needed restart, but will help protect one of America’s promising assets.. As the island has already defaulted on August’s payment, it will mean inevitable doom if nothing is done before its next payment in January is due.

As U.S. Representative Luis Gutierrez recently explained, “We own [Puerto Rico.] It is ours and we are responsible for it.” It is the United States’ obligation to make sure Puerto Rico is prospering, not drowning.

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