Puerto Rico this week, with its creditors depleted and no other way to make money, had to file for a form of bankruptcy relief from federal courts this week. This is the first time a territory or state has fallen into this much debt and had to file for this claim.
“The action sent Puerto Rico, whose approximately $123 billion in debt and pension obligations far exceeds the $18 billion bankruptcy filed by Detroit in 2013, to uncharted ground,” reports the New York Times.
This means that while, in the long run, Puerto Rico may be able to have a more solid foundation than ever before; short term, government employees will have to forgo benefits and salaries, and any projects in terms of construction or public health will be left at a standstill.
The New York Times reports:
The action sent Puerto Rico, whose approximately $123 billion in debt and pension obligations far exceeds the $18 billion bankruptcy filed by Detroit in 2013, to uncharted ground.
While the court proceedings could eventually make the island solvent for the first time in decades, the more immediate repercussions will likely be grim: Government workers will forgo pension money, public health and infrastructure projects will go wanting, and the “brain drain” the island has been suffering as professionals move to the mainland could intensify.
Puerto Rico is “unable to provide its citizens effective services” because of the crushing weight of its debt, according to a filing on Wednesday by the federal board that has supervised the island’s financial affairs since last year. The total includes about $74 billion in bond debt and $49 billion in unfunded pension obligations.
While many of Puerto Rico’s circumstances are unique, its case is also a warning sign for many American states and municipalities — such as Illinois and Philadelphia — that are facing some of the same strains, including rising pension costs, crumbling infrastructure, departing taxpayers and credit downgrades that make it more expensive to raise money. Historically, Puerto Rico was barred from declaring bankruptcy. In the end, however, financial reality trumped the statutes, and Congress enacted a law last year allowing bankruptcy-like proceedings.
Puerto Rico has been in a painful recession since 2006, and previous governments dug it deeper into debt by borrowing to pay operating expenses, year after year. For the last two years, officials have been seeking assistance from Washington, testifying before stern congressional committees and even making fast-track oral arguments before the United States Supreme Court.
At the same time, Puerto Rico’s efforts to coax its creditors to agree to concessions have gone nowhere. Now the coming court proceedings will give Puerto Rico extraordinary powers to impose losses on holdout creditors unilaterally.