THE government of Puerto Rico said in 2015 that the island could not pay its debts. Yet it was only on May 3rd that it kicked off the biggest bankruptcy case in America’s history. Public-sector debts total almost $74bn (around 100% of GNP). The drawn-out fiscal crisis has both imperilled Puerto Rico’s economy and upended the island’s politics.
Something akin to bankruptcy is possible only because of a federal law passed in 2016. Until then, the island’s legal status as a territory afforded it no escape from its debts (were Puerto Rico a state, its public utilities could have declared bankruptcy). The law established a “financial oversight board”, appointed in Washington, with the task of reaching a deal with bondholders. But it also allowed for bankruptcy-like proceedings should negotiations fail.
A two-thirds majority of bondholders would have forced all of them to accept a reduction in the value of their debt. Yet agreement was always unlikely. Puerto Rica’s constitution says payments to holders of so-called “general obligation” bonds have priority over all other expenditure. But another group of creditors have first dibs on revenue from the sales…Continue reading