Creditors File New Suits Against Puerto Rico amid Debt Crisis

Bondholders of Puerto Rico's multi-billion dollar debt load filed to sue the U.S. territory early Tuesday after the expiration of litigation freeze, accusing the government of violating the U.S. Constitution with its debt-cutting plans.

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The complaint, filed in federal court in San Juan, represents the group of so-called COFINA bondholders, which bought bonds backed by Puerto Rico’s sales tax revenue. In the lawsuit, the creditors accused Puerto Rico’s leadership of impairing their contractual rights and slammed the government’s latest plan to restructure the debt as unconstitutional.

Another lawsuit was filed by Ambac Assurance Corp., which insures US$1.3 billion of the debt. It alleged its constitutional rights were also violated and had been forced to pay more than US$52 million in insurance claims.

For years, Puerto Rico borrowed money by issuing municipal bonds to keep its government running as revenue declined. In 2015, its governor announced that the island's nearly US$73 billion debt was “unpayable.”

Last year, the U.S. Congress approved a so-called rescue package for Puerto Rico through the controversial PROMESA law. Along with setting up an Obama-appointed federal control board to manage Puerto Rico's economy, the package also included a litigation freeze to help the government negotiate with its creditors. But when the litigation freeze expired after May 1, the administration of Governor Ricardo Rossello has still failed to reach a deal with the bondholders, exposing the island to the new wave of lawsuits.

The government last Saturday offered to pay 50 cents on the dollar to holders of general obligation and sales-tax bonds. Bondholders rejected the offer, as it favors general obligation bondholders.

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More lawsuits are expected as bondholders seek to recover the money they invested through various Puerto Rico government bonds.

"While we have not yet achieved an agreement in this instance, our lines of communication remain open, and we welcome the opportunity for further discussions," Gerardo Portela, executive director of the Fiscal Agency and Financial Advisory Authority, said to the Associated Press.

The other option left for the government is to officially declare what's known as Title III under PROMESA. The Title III process, similar to U.S. bankruptcy — an option not available to the island given its colonial status as a U.S. territory — allows Puerto Rico to address all of its debts at once in a comprehensive process. It would protect the island from lawsuits and give it more legal sway for contractual alterations it proposed to impose.

Ahead of the deadline Monday, thousands of Puerto Rican protested against the austerity measures that have been rolled out on the island in the name of addressing the debt crisis. Marches protested the PROMESA fiscal control board, demanded an audit of the debt, which they slammed as illegitimate and criticized the belt-tightening policies that have targeted education, health care and other public services.

A mind-boggling report by the ReFund America Project found that nearly half of the debt the island owes is not borrowed funds, but interest on bonds underwritten by Wall Street firms, who are raking in big profits from predatory lending schemes.

Amid the debt crisis, nearly half of Puerto Rico’s population lives in poverty and child poverty is soaring at 60 percent. The island faces a Medicaid funding gap of US$650 million this year, while unemployment is nearly twice the average of the rate in U.S. states.