Puerto Rico announced a historic restructuring of its debt, making it one of the biggest Puerto Rican bankruptcy announcements in recent times. On Wednesday, this unincorporated territory of the US threatened the municipal bond market worth $3.8 trillion with a bankruptcy. Recently, the territory was threatened by the creditors who planned to sue it for bond defaults. With $70 billion in debt, Detroit’s insolvency of 2013 looks dwarfed in comparison.
How Will Puerto Rican Life Change?
As the government files for bankruptcy, it would be able to discount the creditors heavily. However, the economy will come to a standstill. More than 45 percent of the island’s population lives in poverty. The unemployment rate here is 11 percent. It is to be noted that the population has declined by 10 percent in the past 10 years. As the economy has been in recession during these 10 years, people have moved away from home.
Now, with a Puerto Rican bankruptcy filing, the government will be making it extremely difficult for investors to keep funding its programs. It is highly likely that it would be creating barriers to the debt markets of the island. Additionally, an already poor population of the island will now be subjected to a lack of educational and healthcare services. There could also be grave reductions in worker benefits and pensions. Poverty and migration could become more problematic for the authorities.
Details of the Puerto Rican Bankruptcy Filing
Puerto Rico does not qualify for a traditional municipal bankruptcy. Hence, the island’s financial oversight board petitioned for the same under PROMESA, Title III. This petition under Title III will allow similar bankruptcy protection as in the US. However, this filing does not represent an accurate picture of the island’s debt problem. It only includes a $18 billion debt on the central government. Apart from this, the island has COFINA debt of $17 billion.
The different types of debt on the government will be restructures and included in the subsequent filings. The pension debts of the island will also get restructured. In fact, it is this debt of $49 billion, owed to pension liabilities that have forced the island to opt for bankruptcy. Adviser to the Governor of Puerto Rico Ricardo Rossello, Elias Sanchez, suggested that more debt will be included in filings.
The sheer amount of debt on the government makes it a bigger case of bankruptcy than Detroit. The city, in 2013, filed for a bankruptcy following $18 billion in debt. Puerto Rico has more debt in pension liabilities alone. More than 70 percent mutual funds in America hold Puerto Rican debt which could bring a major shock to the US economy. The governor had earlier noted that the island only has $800 million to pay for its debt. Creditors criticized the filing. they suggested that negotiations should have continued before such a filing was made.
A federal judge will decide the distribution of assets among creditors in two days.