Puerto Rican government-debt crisis
[a] The crisis began in 2014 when three major credit agencies downgraded several bond issues by Puerto Rico to "junk status" after the government was unable to demonstrate that it could pay its debt.
To prevent such a scenario, the United States Congress enacted a law known as PROMESA, which appointed an oversight board with ultimate control over the Commonwealth's budget.
However, Puerto Rico’s economy faces challenges such as high public debt, dependence on U.S. fiscal policies, and the features of its geopolitcal location containing many natural disasters.
[6] Between 1996 and 2006, Congress eliminated the tax credits, contributing to the loss of 80,000 jobs on the island and causing its population to shrink and its economy to contract in all but one year since the Great Recession.
[11] The government was able to issue an unusually large number of bonds in part due to dubious underwriting from financial institutions such as Santander Bank, UBS, Barclays, Morgan Stanley, and Citigroup.
[m][25][26] The Department of Treasury also tends to publish its comprehensive annual financial reports late, sometimes 15 months after a fiscal year ends, and the government as a whole constantly fails to comply with its continuing disclosure obligations on a timely basis.
The government has also been unable to set up a system based on meritocracy, with many employees, particularly executives and administrators, simply lacking the competencies required to perform their jobs.
[r][s] During the New Deal, an appointed Governor, Rexford Tugwell, created the Puerto Rico Electric Power Authority (PREPA) by nationalizing the island's private utilities.
[8] In 2012, the Puerto Rico Ports Authority was forced to sell the Luis Muñoz Marín International Airport to private buyers after PREPA threatened to cut off power over unpaid bills.
[t][u] Before Padilla's admission, various government instruments had already entered into forbearance agreements with their lenders, but the warning still provoked a drop in Puerto Rican bonds and stocks.
[46] However, by the end of February 2014, municipal bond funds that relied on specific debt had already experienced the backlash, which left portfolio managers with fewer options in the market.
[citation needed] Some, like House Minority Whip Jenniffer González, claim the crisis is mere propaganda, created so the incumbent political party could enact, amend, and repeal laws that it would otherwise be unable to justify.
[z][aa] Others, such as the President of the Senate of Puerto Rico, Eduardo Bhatia, claim the crisis was created by ruthless investors, who wish to profit from credit downgrades.
[55] In response to the hedge fund report, Víctor Suárez Meléndez, chief of staff of the governor of Puerto Rico, indicated that "extreme austerity [alone] is not a viable solution for an economy already on its knees".
[55] On October 14, 2015, the Wall Street Journal reported that "U.S. and Puerto Rican authorities were discussing the possibility of issuing a "superbond" as part of a restructuring package".
[58] Expanding on that argument, Meacham posits that the government-debt crisis can be solved by enhancing Puerto Rico's autonomy or by giving the island protections and rights similar to those bestowed by statehood.
[61] The following June, in Puerto Rico v. Franklin California Tax-Free Trust (2016), that ruling was additionally affirmed by a U.S. Supreme Court in a vote of 5–2, with Justice Sonia Sotomayor dissenting.
[62] Puerto Rico or any of its political subdivisions and agencies cannot file for debt relief under Chapter 9, Title 11, United States Code because it applies only to municipalities on the mainland.
The Times also traced opposition from the hedge funds, US Senator Marco Rubio, and Jenny Beth Martin of Tea Party Patriots to Congressional bills which would expand public-authority bankruptcy restructuring options.
[65] Following the Berkshire Hathaway annual meeting, Warren Buffett told CNBC on May 2: Puerto Rico, they’ve been kicking the can down the road for a long time, and they even raised new money, I think, not much more than a year ago, a very high price for hedge funds.
The answer to financial problems is not more borrowing, more borrowing, but they’ll do it as long as they can and finally the day of reckoning comes and it would have been so much easier to tackle the problem earlier and no, you know, you got all different classes of bondholders and other claimants and they’re gonna fight like crazy.On June 30, 2016, President Barack Obama signed the Puerto Rico Oversight, Management and Economic Stability Act, or PROMESA, which empowered him to appoint a seven-member Financial Oversight and management board, with ultimate control over the Commonwealth's budget and the power to negotiate the Commonwealth's debt restructuring.
They also stated, "Congress must enact measures recommended by both Republicans and Democrats that fix Puerto Rico's inequitable health care financing structure and promote sustained economic growth.
[74] He proposed austerity measures such as cutting payments to government pensioners, who do not receive Social Security, by 10%, which prompted criticism from the island's chapter of the Service Employees International Union.
[74] Governor Rosselló discussed the situation in an interview with the international Financial Times in January and indicated that he would seek an amicable resolution with creditors and also make fiscal reforms.
[75] In late January 2017, the control board extended the deadline to the government to February 28 for the latter present a fiscal plan which including negotiations with creditors for restructuring debt.
[76] Rosselló hired investment expert Rothschild & Co in January 2017 to assist in convincing creditors to take deeper losses on Puerto Rico's debts than they had publicly expected.
[77] In late January, the Oversight Board set up under PROMESA gave the Commonwealth until February 28 to present a fiscal plan, including negotiations with creditors, to solve the problems.
[74] On May 17, 2017, Swain traveled to San Juan for the first day of hearings, and she ultimately agreed to allow the Oversight Board and the Commonwealth to pursue separate lawsuits at the same time in a joint adjudication.
[84] On August 7, 2017, Aurelius Capital Management had Theodore Olson file another lawsuit, which now alleged that the selection of the Oversight Board violated the Appointments Clause of the US Constitution.
[82] Gov.-elect Pedro Pierluisi started the public meetings by outlining his key areas of focus including COVID-19 response, infrastructure works and getting Puerto Rico out of Title III bankruptcy “as quickly as possible.”[88]
