Puerto Rico is seeking to use federal bankruptcy-like proceedings to slash its $70 billion debt after more than a year of talks with bondholders and insurers, pushing the territory toward the biggest restructuring ever by a U.S. state or local government.
After a decade-long recession, a population exodus and years of borrowing to cover budget gaps, the U.S. commonwealth is asking a court to force creditors to take losses on their investments. The process, called Title III, was created by a U.S. law enacted last year to help Puerto Rico emerge from its economic malaise.
The move, announced by Governor Ricardo Rossello and then followed by a filing in U.S. court in San Juan, came after he and his predecessor both failed to persuade the island’s major creditors to accept less than they’re owed and the government faced an onslaught of new lawsuits stemming from a series of defaults.
“An orderly process for working out Puerto Rico’s debt trouble provides the best hope for Puerto Rico and also the best chance for most creditors to emerge better off,” Brad Setser, senior fellow at The Council on Foreign Relations, said in a telephone interview. “But clearly there’s going to be fights between different groups of creditors.”
Puerto Rico’s restructuring will be the largest ever in the $3.8 trillion municipal-bond market. The island, where nearly half its residents live in poverty, has struggled since 2006 to grow its economy. About 62,000 residents left the island last year, the steepest decline since 2004.
“We have reached this decision because it protects the best interests of the people of Puerto Rico,” Rossello, who took office in January, said.
Some bondholders disagree. A group of hedge funds holding general-obligation bonds claim a deal with Puerto Rico was within reach Tuesday until a federal board that oversees the commonwealth’s finances intervened and blocked a potential agreement.