Reuters reports that yesterday, June 29, 2015, in a televised address, Governor Alejandro Garcia Padilla said Puerto Rico faces bankruptcy and asked that the commonwealth be allowed to restructure its debts under U.S. bankruptcy code. But Puerto Rico is not eligible for debt restructuring under the U.S. bankruptcy code because it is not a municipality.
Note: Puerto Rico is an incorporated U.S. territory in the Caribbean with a total population of around 3.6 million people, 12.5% of whom are black or sub-Saharan African. As such, people born in Puerto Rico are natural-born citizens of the United States. The territory operates under a local constitution, and Puerto Ricans elect a governor. However, Puerto Rico lacks voting members in the U.S. House of Representatives and the U.S. Senate, both of whom have plenary jurisdiction over it under the Puerto Rico Federal Relations Act of 1950. A 2012 referendum showed a majority (54% of Puerto Rico’s electorate) disagreed with “the present form of territorial status” and preferred full statehood in the USA. (Source)
Governor Padilla said sacrifice must be shared by bondholders, as he called for Washington to allow a bankruptcy debt restructuring. Padilla said his goal is to come up with a negotiated moratorium with bondholders to postpone debt payments for a number of years.
The Caribbean island is struggling to relieve a $73 billion debt burden. It came to a crunch point on Monday – at the same time as did debt-laden Greece – after a dire report on its stability by former International Monetary Fund economists was released ahead of key deadlines on Wednesday to repay debt.
Steven Rhodes, the retired U.S. bankruptcy judge who oversaw Detroit’s historic bankruptcy and has now been retained by Puerto Rico to help solve its problems, gave a blunt assessment on Monday. He said Puerto Rico “urgently needs our help. It can no longer pay its debts, it will soon run out of cash to operate, its residents and businesses will suffer.” Rhodes said the island’s future hinges on gaining eligibility for debt restructuring, while stressing that bankruptcy would not be a “bailout.”
Padilla said, “Puerto Rico needs a complete restructuring and development plan, comprehensive and inclusive, that takes care of the immense problem we face today, not on a short but on a long-term and definitive basis. The alternative would be … halting of payments with all the negative consequences that this implies.”
Padilla said the next step must be to get creditors to agree to more favorable payment terms. He is establishing a working group to examine restructuring public debt, with a deadline to have a plan by Aug. 30. The legislature is required to approve the plan.
Former IMF economist Anne Krueger, co-author of the report commissioned by Puerto Rico which recommended debt restructuring, tax hikes and spending cuts, said, “The situation is dire, and I mean really dire. The needed measures may face political resistance but failure to address the issues would affect even more the people of Puerto Rico.”
Gov. Padilla warned that, if Puerto Rico follows the report’s recommendations of debt restructuring and austerity measures, Puerto Ricans may face cuts in services as the government reduces spending, including fewer teachers, higher property taxes and suspension of the minimum wage.
But the report, made available late Sunday, said Puerto Rico’s fiscal problems are much worse than assumed and that the island needs to restructure its debts because tax rises and spending cuts alone would not be enough of a fix.
Bondholders, even those who own government debt that is generally regarded as sacrosanct, would have to take a hit under the report’s recommendations. The report recommended a debt restructure via a voluntary exchange of existing bonds for new ones with a longer or lower debt service profile.
The prospect of a debt restructuring spooked investors and sent the price of Puerto Rico’s benchmark general obligation bonds that carry an 8% coupon and mature in 2035 74514LE86=MSRB down nearly 10% to a record average low of 69.510 cents on the dollar. Shares of monoline bond insurers with exposure to Puerto Rico’s securities fell sharply. Assured Guaranty (AGO.N) shares fell 13.3% while MBIA Inc (MBI.N) dropped 23.4%.
The U.S. government seems unlikely to get involved despite months of talks between Puerto Rico and the U.S. Treasury about options to seek financial help. An unnamed White House source familiar with the situation said, “There’s no one in the administration or in D.C. that’s contemplating a federal bailout of Puerto Rico.”
See also:
- Stop Puerto Rico becoming 51st welfare state!
- Rigged House bill to make Puerto Rico 51st welfare state
- No easy way for Puerto Rico to overhaul government debt
- Puerto Rico’s deepening crisis threatens high-yield U.S. funds
- Greek debt crisis: Banks to stay shut, capital controls imposed
~Éowyn
