Puerto Rico Begins Bankruptcy Process in Face of Massive Debt

Puerto Rico began Wednesday a process similar to filing for bankruptcy in order to restructure its massive US$73 billion dollar debt in the midst of ongoing austerity measures that have severely exacerbated inequalities on the colonized island where poverty rates are already at almost 50 percent.

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The process, known as Title III, was announced May 3, a day after several major creditors, including hedge funds with “vulture fund” reputations, sued Puerto Rico for defaulting on its bonds.

"This is a historic process," Eric LeCompte, the executive director of Jubilee USA who is in San Juan to monitor the process, said in a statement. "The legislation and process is unique among bankruptcy processes because it can restructure all of Puerto Rico's debt and ensures that all creditors participate in the process."

Title III — provision in the contentious and widely protested Puerto Rico Oversight, Management, and Economic Stability Act, known as PROMESA, which was signed into effect last year — offers a process akin to bankruptcy for the colonized island.

"Clearly we don't know what to expect, but it is going to be a lengthy and tortuous process. This is going to take longer than Detroit," said Mikhail Foux, municipal research director at Barclays Capital in New York to Reuters.

The process for Detroit took 18 months.

With declining revenues, the U.S. protectorate borrowed money by issuing municipal bonds to keep the government running. In 2015, Puerto Rico's governor, Alejandro Javier García Padilla, announced that the island's nearly US$73 billion debt was “unpayable.”

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Although Detroit notably declared bankruptcy on its US$18 billion dollar debt, which only amounts to a quarter of Puerto Rico's, the island's status as a U.S. territory has prevented it from declaring bankruptcy on its debt until now. In 1984, an amendment to U.S. bankruptcy law under Chapter 9 specifically excluded Puerto Rico, laying the groundwork for the current crisis to occur.

Efforts by the U.S.-appointed and unelected fiscal control board that was established by PROMESA to manage the debt crisis have included oppressive austerity measures. Recently the government — under pressure of the fiscal control board — announced education budget cuts amounting to US$450 million by 2021, a move that was met by student protest and strike.

"Puerto Rico will not see economic growth until the debt is restructured and the austerity is getting worse," LeCompte said at a forum of the House Natural Resources Committee and Congressional Hispanic Caucus.

“The government of Puerto Rico complied with PROMESA and put in place a fiscal plan that cuts monies to the University of Puerto Rico, further cuts healthcare access to vital services, cuts pensions and freezes and reduces public sector salaries” LeCompte continued.

Although LeCompte acknowledged that “the problem will get worse before it gets better,” he was optimistic that the Title III procedures will provide needed debt relief and lead to economic recovery.

"In the coming years, Puerto Rico will still have a lot of obstacles to overcome but if this process is done right, Puerto Rico will have a clear path for recovery and economic growth,” LeCompte added.

Austerity measures to health and education enacted during the duration of the debt restructuring will continue to affect the daily lives of people in Puerto Rico, where child poverty is at almost 60 percent. At the end of May, 184 public schools are expected to close as part of ongoing austerity.

According to reports by the Debt Audit Commission and Saqib Bhatti and Carrie Sloan of the ReFund America Project, approximately US$36.9 billion of the total Puerto Rican debt is illegal because it involves “extra-constitutional” debt with predatory interest rates.