Puerto Rico announced a historic restructuring of its public debt on Wednesday, touching off what may be the biggest bankruptcy ever in the US$3.8 trillion U.S. municipal bond market.
While it was not immediately clear just how much of the U.S.-colonized island nation's US$70 billion of debt would be included in the bankruptcy filing, the case is sure to dwarf Detroit's insolvency in 2013.
The move comes a day after several major creditors, including usurious hedge funds with “vulture fund” reputations, sued Puerto Rico for defaulting on its bonds.
Bankruptcy will likely impact the daily lives of the people of Puerto Rico, who could face austerity measures such as cuts in pensions, worker benefits, and a reduction in health and education services.
The U.S.-dominated island's economy has been in recession for nearly an entire decade while the population has fallen by about 10 percent in the past decade.
The bankruptcy process will also give Puerto Rico the legal ability to impose drastic discounts on creditor recoveries, but could also spook the investors who have preyed on the island, prolonging the nation's lack of access to debt markets.
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The debt restructuring petition was filed by Puerto Rico's financial oversight board in the U.S. District Court in Puerto Rico on Wednesday and was made under Title III of last year's U.S. congressional rescue law known as PROMESA.
The Title III provision allows for a court debt restructuring process akin to U.S. bankruptcy protection. Puerto Rico is barred from a traditional municipal bankruptcy protection under Chapter 9 of the U.S. code.
The filing includes only Puerto Rico's central government, which owes some US$18 billion in debt backed by the island's constitution.
On paper, it does not include US$17 billion of sales tax-backed debt, known as COFINA debt, or debt from other agencies.
But those debts are likely to be pulled into the bankruptcy, or included in separate bankruptcy proceedings in coming days, Elias Sanchez, an adviser to Governor Ricardo Rossello, told Reuters on Wednesday.
Puerto Rico's massive pension debts will also likely get restructured in the bankruptcy.
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The previous largest U.S. public bankruptcy, Detroit's in 2013, covered some US$18 billion in debt. The city was able to reach an agreed debt restructuring with stakeholders, in part by soliciting huge contributions from philanthropic foundations so it did not need to sell the city's art collection.
But "unlike Detroit, there isn’t billions of unencumbered artwork to fund a restructuring" in Puerto Rico, said David Tawil, whose fund, Maglan Capital, held Puerto Rico general obligation debt but has since sold it.
Rossello's fiscal plan for the island, approved by the oversight board in March, forecasts Puerto Rico having only US$800 million a year to pay in debt, less than a quarter of what it owes. The low figure alienated creditors intent on plundering the island while negotiations toward an out-of-court restructuring foundered.
Nearly half of the people of Puerto Rico live in poverty while child poverty soars at 60 percent. The U.S.-dominated island nation faces a Medicaid funding gap of US$650 million this year, while unemployment is nearly twice the average rate in the U.S.