Puerto Rico missed its first ever bond payment in August of
this year. Until this default three months ago, the U.S. territory had flirted with default several times yet always secured financing in the final hour. The payment failure validated claims made by Puerto Rican Governor Alejandro García Padilla that the commonwealth could not make bond investors whole on a portion of $72 billion of debt.
Legislators working to find a resolution for Puerto Rico’s
perilous situation are forced to be creative – possibly inventive – because the territory is not granted relief under Chapter 9 bankruptcy, which is reserved for municipal governments that wish to reorganize debts. The newest plan comes directly from the Obama administration, but will need to be detailed and approved by Congress. Republicans in the House and Senate are expected to put up a fight on the basis of reigning in spending, which could prolong the turmoil in Puerto Rico. Dragging out the debt reorganization exacerbates the risk of the situation “turning into a humanitarian crisis as early as this winter,” said an official in the Obama administration. Vital services, such as law enforcement and health care, are entangled in the debt crisis and could become unavailable to more than 3 million American citizens who reside on the island.
The proposal would grant Puerto Rican municipalities the
ability to declare bankruptcy, while keeping in place the restriction on the government to file. A reorganization under this scheme is expected to reduce the debt burden by roughly a third. Included in the new legislation would be health care and economic reform aimed at stabilizing and growing Puerto Rico’s economy out of a decade-long recession.
The administration is adamant that the arrangement is not a
bailout. This seems obvious, but Republicans remain wary. Investors will be taking haircuts, of course, but the U.S. government is not expected to put forth large sums in this resolution. It will be interesting to see how far those on the right are willing to stick to political lines, especially if the situation were to turn dire. If a standoff develops, it could expose just how recklessly stubborn American politicians are.