Puerto Rico, Facing Debt Crisis, Won't Wait for the Supreme Court

Puerto Rico went before the Supreme Court two weeks ago, arguing that it should have the right to restructure its public debts. While the commonwealth is facing a massive debt crisis -- the island owes creditors more than $70 billion, about 70 percent of its GDP -- federal law prevents it from taking advantage of bankruptcy procedures. That exclusion from the bankruptcy code, the island argues, shouldn't prevent it from restructuring its debt under its own laws.

And while the Supreme Court waits to make a decision, the debt crisis continues spiraling onward. After debt holders sued to freeze some government assets on Monday, the island responded yesterday by passing a law stopping all debt repayment.

Billions in Debt, No Way Out

Puerto Rico's debt crisis has been years in the making. Facing a decade-long recession, the government of Puerto Rico relied on bond revenue to make up for budget deficits, eventually building an unsustainable amount of public debt. As Puerto Rico's economy has faltered, the government has slashed services in order to help meet debt payments, leading to an exodus of thousands of Boricuas to the mainland U.S.

Every day, the island's economic problems get worse, while debt repayment becomes more difficult.

The government has long argued that it should be allowed to restructure its debts through bankruptcy, just as any of the 50 states can. But, in 1984, Congress acted to strip Puerto Rico of that right -- largely without explanation. In revisions to the bankruptcy code, Congress kept Puerto Rico's public utilities, the source of much of the island's debt, from declaring bankruptcy, while simultaneously limiting Puerto Rico's ability to devise its own debt solution plans.

Those 1984 revisions recently brought the island into the Supreme Court. In Puerto Rico v. Franklin California Tax Free Trust, for which the Court heard oral arguments on March 22nd, the island argued that its exclusion from bankruptcy protections shouldn't preempt it from creating its own restructuring plans.

But the island's debt crisis cannot wait, it seems, for the Supreme Court to deliberate.

Creditors Sue, Puerto Rico Stops Debt Payments

Not long after the Supreme Court oral arguments, reports came out that the Government Development Bank was nearly insolvent. The GDB is a key financial institution in Puerto Rico's government, its bond issuer, fiscal agent, and financial advisor.

That news escalated the crisis, as a hedge funds holding Puerto Rican debt went to court to block the government from withdrawing funds from the bank.

Soon after, Puerto Rico's legislature passed a debt moratorium, halting all bond payments but allowing the GDB to go into receivership if necessary.

The move certainly doesn't settle the conflict between Puerto Rico and its creditors. Indeed, it's sure to lead to a whole new wave of litigation. And it probably won't help Puerto Rico's chances in Congress, where Republicans have firmly opposed bankruptcy relief. But it does buy the island some time -- perhaps time enough to win a favorable ruling from the Supreme Court.

Related Resources:

• Puerto Rico's Other Crisis: Impoverished Pensions (Reuters)
• Puerto Rican Sovereignty Questioned in Supreme Court (FindLaw's U.S. Supreme Court Blog)
• Argentina Returns, Again Seeking Cert. in Bonds Case (FindLaw's U.S. Supreme Court Blog)
• A Crazy Puerto Rican Gay Marriage Suit May Kill the Insular Cases (FindLaw's U.S. Supreme Court Blog)