Puerto Rico files for bankruptcy

Ricardo Rossello

Puerto Rico's Governor Ricardo Rosselló has filed for bankruptcy in federal court.

In the midst of Puerto Rico's financial calamity, Rossello, a scientist and the son of a former governor of the island, has been advocating for Puerto Rico to gain statehood as a means to help it dig out from $70 billion in public debt. But U.S. states and territories like Puerto Rico aren't eligible for bankruptcy protection under chapter 9.

Simon Johnson, a professor of entrepreneurship at the MIT Sloan School of Management, warned Tuesday that failure to activate Title III would result in "chaos", as creditors filed lawsuits in multiple courts. However, while creditors holding secured bonds may emerge relatively unscathed, those who hold unsecured bonds - wagering that Puerto Rico would remain ineligible for bankruptcy - are likely to take major hits.

Unlike a typical bankruptcy, after filing in the District Court for the District of Puerto Rico, PROMESA requires the Chief Justice of the United States Supreme Court to appoint the district court that will oversee the Title III proceeding.

"Puerto Rico is no longer shielded from creditors rushing to the courthouse to lay claim to its assets - that includes the beaches, pieces of art, historical furniture and any assets whether they are nailed down or not".

Conversely, Susheel Kirpalani, a lawyer for COFINA bondholders, called bankruptcy "sound public policy", saying in a statement it "enables Puerto Rico to freeze numerous lawsuits" and "maintain essential services".

Puerto Rico is barred from using the same bankruptcy law provisions benefiting other U.S. municipalities. As this case moves forward, it will represent the largest bankruptcy ever experienced by the US municipal bond market, estimated to be worth $3.8 trillion.

Rep. Nydia Velázquez, D-N.Y., who was born and raised in Puerto Rico, said that thanks to the law, the territory has the tools it needs to climb out of its crisis.

The mountain of debt has left Puerto Rico struggling and the island - a former Spanish colony of 3.5 million and a U.S. territory for more than a century - has several times failed to make payments.

It is estimated that about 45% of Puerto Ricans on the island live in poverty.

And those economic woes have taken their toll.

The island territory, 1,500 miles from Washington, 's saw its population plummet to 3.4 million from more than 5 million. Businesses experienced power failures from the state-owned utility. The administration has also adopted an aggressive tax collection agenda with the aim of collecting over $400 million the government says is owed to it.

The rescue plan involving the oversight board was fraught with politics as it wound its way through Congress past year. But Congress has not acted to extend the stay and US President Donald Trump recently expressed disdain for what he characterized as a "bailout" of Puerto Rico. He said he did not yet have details on the breakdown of those debts. "Make no mistake: The board has chosen to turn Puerto Rico into the next Argentina".


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