The New York Times’ Deal Book reports that Puerto Rico’s debt problems are reaching “a critical point.” According to the article, Puerto Rico cannot handle its existing debt load.
Moreover, while American cities and municipal entities may use Chapter 9 of the Bankruptcy Code
, American states and territories may not. Therefore, Puerto Rico has no viable mechanism at present for resolving its debt problems in bankruptcy court. Joseph Rosenblum, the director of municipal credit research at AllianceBernstein states that Puerto Rico would seem to be running out of liquidity quickly.
Puerto Rico’s overall debt, on a pro-capita basis, is bigger than that of any state, according to the New York Times, and investors have been making increasingly more stringent demands before they will pour additional money into the island. This is in contrast to past practice, where Puerto Rico was able to sell as much debt as it needed to because all 50 American states made the interest on such bonds tax exempt. Moreover, there did not seem to be any difficulty with investors’ expectations that the debt would be repaid. Last summer, however, the Puerto Rican legislature passed a Recovery Act, which would have enabled Puerto Rico to restructure the debt of some of its public corporations. This shook the investor community, according to Deal Book. That statute was overturned in curt, although the issue is on appeal.
The issue is likely to come to a head soon, as the New York Times reports that Puerto Rico may need to borrow as much as $2.9 billion this spring, in order to continue to finance its existing debt load.