Puerto Rico is officially bankrupt — now comes the hard part

Puerto Rico is officially bankrupt — now comes the hard part
AFP / Stringer

On Wednesday, Puerto Rico filed for what’s pretty much bankruptcy (it can’t file under Chapter 9 of the federal bankruptcy code like local government can, but a federal law passed last year allows bankruptcy in everything but name).
With bond debt reaching nearly $74 billion and pension obligations of roughly $49 billion, the territory’s level of debt, and subsequent move, is without historical precedent — even compared with Detroit’s $18 billion bankruptcy in 2013. [New York Times / Mary Williams Walsh]
The day before, Puerto Rico was sued by several of its major creditors when a moratorium on lawsuits against the commonwealth created by last year’s congressional rescue law (called the Promesa law) officially expired. [Reuters / Nick Brown]
The government of Puerto Rico has floated a plan to balance its budget over three years, but the level of austerity that would require is extreme — and protesters have already hit the streets over the proposed changes. Many others are voting with their feet and moving to the US mainland; Puerto Ricans are US citizens. This exodus is already happening — the Economist reports that the island’s population is 8 percent smaller than it was in 2010. [Economist]
This situation is truly unprecedented, so it’s hard to say what will happen next, but most expect the general outline to go like this: Supreme Court Chief Justice John Roberts will select a judge, probably a US district court judge, to oversee bankruptcy proceedings; an oversight board will get to work negotiating debt cuts and proposing a plan of adjustment — which the judge will have to approve and which could yield further debt reduction; Puerto Rico will try to stanch its bleeding through austerity measures, like scaling back health care coverage or introducing pension cuts, but it may face pressure to sell assets, like beachfront property, to raise money to pay off its debt. [USA Today / Nathan Bomey]
If this sounds bad for pensioners, it’s going to enrage Wall Street too. Reuters analyzed data from Moody’s Investors Service and found that “[i]n five of six recent public bankruptcies in which the debtor defaulted on bonds, pensioners walked away with full recovery, while bondholders took haircuts.” [Reuters / Nick Brown]
And it will be terrible for just about anyone relying on public services. One of the first hit? Students. It was reported this morning that the island is closing 184 public schools, which educate roughly 27,000 students, and an alternate plan for their education has not yet been announced. [Wall Street Journal / Associated Press]
It’s a very bad situation that’s been a very long time coming. Puerto Rico has essentially been in a recession since 2006, and recent estimations put 40 percent of its population in poverty. Meanwhile, in 2014 it saw a massive influx of money lent by hedge funds expecting to earn a 20 percent return on the loans. But the island’s economy never improved, and decades of such borrowing eventually caught up with it. Bankruptcy actually might have happened even sooner — if wealthy lenders hadn’t ruthlessly campaigned against it. [New York Times / Jonathan Mahler, Nicholas Confessore​]


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