Ricardo Arduengo / AP

Puerto Rico’s sovereignty status poses debt difficulties

Economists say Chapter 9 bankruptcy could be a smart path for the island, but a change in US law would be required

Puerto Rico made payments of approximately $2 billion to creditors on Wednesday, staving off imminent default. But the island’s options for facing down its massive debt remain limited, and many analysts say the territory’s peculiar sovereignty status could prevent the island from escaping its crushing financial obligations.

On Monday, Puerto Rico’s Gov. Alejandro García Padilla announced that the island was sitting on $72 billion of debt — an amount, he said, that was simply “not payable.”

Since Puerto Rico is a U.S. territory — not a sovereign country — international institutions like the International Monetary Fund won’t step in to help. But like Greece, Puerto Rico can’t devalue its currency. And while the U.S. government could intervene and institute its own bailout, the Obama administration has ruled it out as an option.

Moreover, Puerto Rico can’t declare Chapter 9 bankruptcy, which Detroit did to restructure its own $18 billion debt. Under U.S. law, that option is only available to municipalities. Chapter 9 proceedings allow an insolvent city protection from its creditors while it works with an assigned judge to negotiate a new payment structure. 

Congress could change the federal statutes regarding Chapter 9, Gillian Tett of the Financial Times pointed out Thursday, but, she wrote, “This seems unlikely to occur soon, since parts of the Republican party fear that letting Puerto Rico use Chapter 9 would prompt other American entities, such as Illinois, to default too.”

Pedro Pierluisi — a non-voting member of the U.S. House of Representatives representing Puerto Rico — urged Congress to amend that law so that Puerto Rico could go through a bankruptcy process.

“H.R. 870 does not require the federal government to spend a single dollar,” he said in a statement, referring to a bill that Democratic Sens. Richard Blumenthal and Chuck Schumer have said they will introduce to allow Puerto Rico to use Chapter 9. “It would simply grant the government of Puerto Rico a power that all state governments have, namely the ability to authorize one or more of its insolvent public enterprises to work out a path forward with its creditors under the supervision of a federal bankruptcy judge based on federal substantive and procedural law.”

Meanwhile, many economists have emphasized the direness of the situation in Puerto Rico, pointing out similarities with Greece. "Both are in desperate need of a solution, but neither can access the solution they're asking for, which is a bankruptcy process," said Eric LeCompte, executive director of Jubilee USA Network.

LeCompte said that if the island were its own sovereign country, it would have the eighth highest rate of indebtedness in the world.

Padilla has targeted Aug. 30 as the deadline for coming up with a fiscal and economic blueprint to stimulate growth and tackle the debt overhang in the territory, which is in its ninth year of recession.

If Puerto Rico does not obtain the right to declare bankruptcy by then, it will either restructure the debt or go into default, LeCompte said. Either one of those options, economists believe, would leave island with less favorable terms with its creditors.

"It's between a rock and a hard place in terms of how to move forward,” he said.

With The Associated Press

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