Puerto Rico defaulted on its debt for the second time in five months, and according to Gov. Alejandro Garcia Padilla, the island is bracing itself for lawsuits.
While the commonwealth was able to pay around $330 million for its general debt payments, which the island is required to prioritize under its constitution, it fell short on meeting its $37 million obligation on interest payments on bonds issued by the Infrastructure Financing Agency and Public Finance Corporation.
The territory currently faces around $72 billion in debt, which the governor has warned on numerous occasions it can’t repay.
During an appearance on CNBC Monday, Padilla cautioned litigation would be costly, adding the island’s Department of Justice is preparing for any legal action that may come its way.
According to American Enterprise Institute economist Desmond Lachman, lawsuits could deepen Puerto Rico’s economic woes and hinder its ability to pay its debts.
“This raises the very real prospect that we could be at the start of a legal free-for-all where different classes of bondholders press their claims in a legal environment where there is no bankruptcy court to adjudicate those claims and to work out an orderly debt restructuring for the island,” Lachman told The Daily Caller News Foundation. “This will be bad for both Puerto Rico and its creditors as a collective since it will further undermine investor and household confidence in the island’s economic prospects.”
Salim Furth, a senior fellow at the Heritage Foundation, told TheDCNF there is a critical distinction between direct debt and debt owed by public corporations.
“In the case of the public corporations, it’s more clear what happens in default: a receiver is appointed by a court and has authority to make changes in the way the corporation does business in order to try to pay its debts,” he said, adding it could lead to full privatization. “In other cases, the receiver might clean up the mess, and return a more efficient utility to the public domain.”
When it comes to direct debt, Furth predicts there will be conflict among creditors due to the territory’s limited financial resources.
While the island is struggling to meet its financial obligations, some analysts say the move was calculated to push lawmakers to extend the commonwealth Chapter 9 bankruptcy rights.
“Governor Garcia Padilla was able to amp up the sense of urgency by noting that no additional money would be available for debt service going forward, including a $400mm payment on GDB debt due in May,” BTIG financial analyst Mark Palmer said in a report released Monday.
Extending bankruptcy rights has been a contentious topic among lawmakers and policy experts, with critics saying Puerto Rico got itself into the predicament after years of wasteful government spending and doesn’t offer a plan to get its way out of financial disarray.
“Let’s not forget that Puerto Rico issued its bonds with the knowledge that Chapter 9 bankruptcy wasn’t an option in the event of a default,” Sen. Chuck Grassley of Iowa said at a Senate Committee on Finance hearing in early December. “Is it fair to retroactively change the rules at the expense of these investors, if other options exist for addressing Puerto Rico’s debt problems?”
The Iowa Republican, along with Sens. [crscore]Lisa Murkowski[/crscore] of Alaska and [crscore]Orrin Hatch[/crscore] if Utah, introduced a bill in the upper chamber that would provide the island with $3 billion in aid, establish an assistance authority to help the commonwealth with its budget process and cut payroll taxes for employees by half.
Desmond said he believes Congress should afford the territory bankruptcy rights and put an advisory board in place to help it get back on its feet.
House Speaker [crscore]Paul Ryan[/crscore] said Puerto Rico’s debt crisis will be on the agenda in the first quarter of 2016.
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