Debt-ridden Puerto Rico fails in bid for municipal bankruptcy rights

Munoz Rivera avenue in the Hato Rey Financial District in San Juan, Puerto Rico (Reuters / Ana Martinez)
A US court has blocked Puerto Rico's attempt to reinstate a local law that would allow the island's municipalities to enter bankruptcy. The US-controlled commonwealth is seeking a bailout from the $72 billion of public debt it cannot pay.

Backing a lower court's decision on Monday, a US Court of Appeals in Boston refused to reinstate a Puerto Rico law that would allow the island to create its own rules for dealings between public agencies and creditors. Puerto Rico's lawyers told the court that Congress had left the territory in a "no man's land," according to Reuters, by excluding it from a federal law that allows public entities, like municipalities, from using US Chapter 9 bankruptcy laws available to the 50 states.

Yet, in a concurring opinion, one judge on the appeals court said that barring Puerto Rican public entities from federal bankruptcy was unconstitutional.

The White House has said it is not considering a federal bailout of Puerto Rico, but that it will push lawmakers to allow Puerto Rico to declare bankruptcy and restructure its financial situation through that process with the help of federal experts, much like the city of Detroit did. Experts from the US Treasury Department and other agencies will consult with Puerto Rico and help guide it through its financial crisis, White House spokesman Josh Earnest said last week.

READ MORE: No federal bailout for Puerto Rico – White House

On June 29, Puerto Rico Governor Alejandro Garcia Padilla said the commonwealth cannot pay its debt due to a decade-long recession and declared that he wanted to defer some payments and implement budget cuts.

“There is no other option. I would love to have an easier option. This is not politics, this is math,” Garcia told the New York Times. “My administration is doing everything not to default … But we have to make the economy grow. If not, we will be in a death spiral.”

He added that restructuring would be the best way forward.

“Puerto Rico needs a complete restructuring and development plan, comprehensive and inclusive, that takes care of the immense problem we face today, not on a short but on a long-term and definitive basis,” Garcia Padilla said, according to Reuters. “The alternative would be ... halting of payments with all the negative consequences that this implies.”

Former US Secretary of State and Democratic Party presidential candidate Hillary Clinton said Tuesday that she supports the right of Puerto Rican public entities to use US bankruptcy laws to restructure its debt.

"The people of Puerto Rico are hurting right now under a weak economy that has been struggling for years," Clinton told Reuters.

"As a first step, Congress should provide Puerto Rico the same authority that states already have to enable severely distressed government entities, including municipalities and public corporations, to restructure their debts under Chapter 9 of the Bankruptcy Code," Clinton added.

Clinton said the "inconsistent and incoherent" prohibition on Puerto Rico's use of US bankruptcy code was a leading driver to the island's dire economic outlook.

"We're not talking about a bailout, we're talking about a fair shot at success," Clinton said.

Republican presidential candidate Jeb Bush said in April that he believes Puerto Rican public entities should be able to access US bankruptcy law.

On Tuesday, the second-ranking Democrat in the US House issued his support for legislation offered by Puerto Rico's non-voting resident commissioner, Pedro Pierluisi, that would allow the island to use US bankruptcy law just as municipalities like Detroit, Michigan have done to restructure debt.

"All parties would be served if there is a restructuring of Puerto Rico's debt," Rep. Steny Hoyer (D-Maryland) said, according to Reuters.

READ MORE: Puerto Rico governor says island can’t pay its $72mn debt

Puerto Rico has an unemployment rate of more than 12 percent, as around 40 percent of its 3.6 million inhabitants live below the US poverty line, according to government records. The Padilla government has slashed public-sector employment while instituting an 11.5 percent sales tax, higher than any US state.

Meanwhile, citing "several moving companies in San Juan," The Miami Herald reported that Puerto Ricans are are fleeing the island in the wake of the harsh economic climate.

“I’ve been thinking about it for a while because I’ve seen how things are deteriorating,” Yessenia Puente told the Herald of her move to Florida. “But with everything happening now, I decided it’s time to go. The system doesn’t work here.”

According to data from the US Census Bureau, the Pew Research Center reported last year that 144,000 Puerto Ricans left the island from mid-2010 to 2013, possibly the largest wave of emigration since the 1950s.

"The Census Bureau has projected that through 2050, unless something changes, the population decline is going to continue and that would make Puerto Rico one of the few places in the United States that actually has a decline in its population," said Mark Hugo Lopez, director of Hispanic research at the Pew Research Center.

In seeking blame for the crisis, some point to the island's colonial status in relation to the US, while others say Puerto Rico's current situation is more complicated.

"More than anything [Puerto Rico’s problems] were self-imposed, the result of actions by a clique of government administrators and finance capital and their intermediaries on the island," said University of Puerto Rico economics professor Argeo Quiñones Pérez, according to Jacobin magazine. "Instead of forging development they maintain a system of extracting surplus that is shared by local businessmen and global interests."