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Stakes are high in Puerto Rico’s ‘bankruptcy’

Ripples will extend far beyond its shores

“Puerto Rico can no longer fully pay its debt and pay for government services.” Oversight board

Facing mountainous debt and population loss, the board overseeing Puerto Rico filed Wednesday for the equivalent of bankruptcy protection in a historic move that’s sure to trigger a fierce legal battle with the fate of the island’s citizens, creditors and workers at stake.

THAIS LLORCA, EUROPEAN PRESSPHOTO AGENCY People face off with police during a strike against austerity measures, in San Juan, Puerto Rico, on Monday.

The oversight board appointed to lead the U.S. territory back to fiscal sustainability declared in a court filing that it is “unable to provide its citizens effective services,” crushed by $74 billion in debts and $49 billion in pension liabilities.

The filing casts a shadow of uncertainty over the future of Puerto Rico pensioners, American retirees who own the island’s debt, institutional investors who backed the island in good times and businesses with lucrative contracts.

Puerto Ricans are U.S. citizens and can move to the mainland at any time, draining the island’s tax base. Tens of thousands have streamed into Florida.

Wednesday’s actions also could also provide hope to residents seeking to preserve access to basic services such as public safety and health care, while also offering a potential route to economic stability for an island that has been suffering for years. Puerto Rico officials have complained that their debt crisis has cut off funds needed to pay doctors and run schools.

Puerto Rico has lost 20% of its jobs since 2007 and 10% of its population, sparking an economic crisis that worsens by the day.

The island’s response has worsened matters. Politicians raised taxes, allowed governmental bureaucracy to balloon, borrowed to pay the bills and promised pensions that the island could not afford.

“The result is that Puerto Rico can no longer fully pay its debt and pay for government services,” the oversight board said in the court filing. “Nor can Puerto Rico refinance its debt — it no longer has access to the capital markets. In short, Puerto Rico’s crisis has reached a breaking point.”

The island’s slumping economy was, perhaps, the final straw. Some six in 10 Puerto Ricans are unemployed or not interested in working, and nearly half are enrolled in Medicaid.

The legal case is not technically considered a bankruptcy filing under the federal code that governs municipal cases, but it’s similar.

Instead, it was filed through a bankruptcy-like mechanism dubbed Title III of legislation authorized by Congress and signed into law by President Obama in 2016.

Here are key questions:


U.S. Supreme Court Chief Justice John Roberts will appoint a lifetenured judge, probably a U.S. District Court judge, to oversee the case, said Melissa Jacoby, a University of North Carolina law professor and expert on municipal bankruptcy.

That’s different than Chapter 9 municipal bankruptcy cases, where a bankruptcy judge controls the process.


The oversight board will try to negotiate debt cuts with creditors, after which it will propose a plan of adjustment. The judge will decide whether to authorize the plan, which could lead to massive debt cuts.


They’re in trouble.

It depends on the status of their debt.

If they hold secured bonds, they might get paid in full. Unsecured bondholders could suffer significant cuts, depending on which types of debt the judge determines to be vulnerable.

Financial creditors, including major investors that had bet on Puerto Rico bonds that were exempt from federal, state and local taxes, argue that their investments were made when the island was not eligible for bankruptcy.


They might face cuts because Puerto Rico has run out of pension funds.

In the Chapter 9 bankruptcy of Detroit, retirees agreed to accept cuts after a federal judge ruled that their pensions could be cut in municipal bankruptcy. That could pave the way for a similar ruling in Puerto Rico.

Pensioners may still fare better than investors, Municipal Market Analytics analyst Matt Fabian suggested Tuesday in a research note. That’s because pensioners are more politically empathetic than creditors and bond insurers.