Joel R. Glucksman
Partner
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Puerto Rico’s troubling debt position threatens its economic viability, and without Chapter 9 bankruptcy protection as an option, the unincorporated U.S. territory is facing a critical financial situation.
The commonwealth’s economy heavily depends on tourism, which has plummeted recently due to declines in Americans’ discretionary spending. In response, the island has been operating largely on bank credit and other short-term measures that are not only unsustainable, but have raised its borrowing costs to a record high, Bloomberg reports. As a further cause for concern, Bloomberg notes that approximately 77 percent of municipal-bond mutual funds hold Puerto Rico debt. Should the island continue to struggle, the federal government may need to step in, a scenario that is unprecedented, the New York Times reports.
The Times notes that Puerto Rico’s debt stands at $87 billion – or $23,000 for every resident. In addition, the territory is struggling to protect its local economy as large swaths of its 3.7 million residents are fleeing the island in search of better economic opportunities. However, unlike U.S. cities and counties that are permitted to seek municipal bankruptcy protection under Chapter 9 of the bankruptcy law, this option is not afforded to Puerto Rico. Under existing legislation, U.S. states and territories lack the ability to declare bankruptcy, leaving Puerto Rico with limited options.
However, Gov. Alejandro Garcia Padilla has noted that the island is not bankrupt in the legal sense of the word, and will continue making strides in overcoming its burdensome debt condition. Despite his optimism, the small commonwealth is graded one step above junk by the three major rating firms and is expected to borrow as much as $1.2 billion by the end of 2013, Bloomberg reports.
Padilla and government officials continue to travel to New York and Washington to discuss different options, one of which is allowing Congress to establish a financial control board to assist the island during its financial turmoil.
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