It finally happened.
After more than a decade of fiscal mismanagement and an outstanding debt of $73 billion and counting, Puerto Rico finally filed for Chapter 11 last month — or, at least, the closest thing to bankruptcy that a U.S. territory can apply for.
As multiple creditors were desperately scrambling to file lawsuits to recoup capital invested in government bonds, Puerto Rico Gov. Ricardo Rossello threw in the towel on May 3 and surrendered oversight of the territory’s finances to a special board created by its legislators to sort out the mess.
Puerto Rico is not the first U.S. government entity to default on its debts — Detroit declared insolvency in 2013 — but it certainly is the largest. (Detroit’s restructuring was for $18 billion.)
And while the stop-gap bankruptcy will give Puerto Rico a bit of a breather to get its economic house in order and will protect vulnerable communities while keeping the lights and gas on, it is not sustainable and could have long-term negative consequences for the commonwealth territory.
Creditors — who, at best, will get 50 cents on the dollar for their loans — will certainly be shy to invest again in the island.
That, in turn, will spur even more economic contraction and unemployment (already at nearly 15 percent) and poverty (now at a whopping 50 percent).
Puerto Rico’s dire fiscal straits has already led to a mass exodus of skilled workers, who as U.S. citizens can easily migrate to the continental United State, generating less contributors and more dependents for the island’s overstretched pensions and social services.
Moreover, Puerto Rico, unlike U.S. states, is not protected by the U.S. bankruptcy code, which means there are no guarantees is the insolvency doesn’t work out.
And while the island tried to enact its own version of insolvency laws, the U.S. Supreme Court shot them down as invalid on the grounds that Puerto Rico is a de facto U.S. colony.
Undaunted, the territory’s lawmakers created a loophole legislation to create Puerto Rico Oversight, Management and Economic Stability Act (PROMESA), which provided the framework for the pseudo-bankruptcy and debt restructuring process.
As part of PROMESA, a bipartisan Financial Oversight and Management Board was created to make fiscal decisions for the island and provide accountability.
But for all their good intentions, PROMESA and the board are not likely to be able to wrangle up enough funds and stability to resuscitate Puerto Rico’s moribund economy, and the process may even exacerbate the fiscal woes even further.
According to some outside analysts, unless the territory can manage to attract large investments, Puerto Rico’s recession will soon turn into a depression, with at least a 16 percent decline in GNP for 2017.
And the cycle of insolvency will only get worse.
Even if it wanted to service part of its outstanding debts as a gesture of goodwill and the appeasement of antsy creditors, Puerto Rico’s coffers are empty.
There’s no money to prime the pump.
The only real way out of the rabbit hole that Puerto Rico has plunged into would be through a full-fledged bailout from Uncle Sam, and with a tight-fisted U.S. Congress focusing on ways to cut healthcare costs and reduce environmental protection spending back at home, that is not a likely scenario.
Thérèse Margolis can be reached at [email protected]