No Recovery Act Respite for Debt-laden Puerto Rico
Puerto Rico’s debt crisis is deepening, and the US island territory’s measures to deal with it are being snuffed out. This Monday, June 13, 2016, the US Supreme Court struck down a law, the Recovery Act, enacted in Puerto Rico with an aim to restructure its public debt. The territory needed to do something to deal with its rising debts since July 1, 2016 is the deadline for it to pay debt payments to the tune of $2 billion. Now with the Supreme Court having made this ruling, Puerto Rico has to depend on the Congress for it to get out of its mire.
The Extent of Puerto Rico’s Public Debt
Failure to make the $2 billion payment would be the largest default for the island territory, soaring above the $370 million default the territory faced at the beginning of May. Puerto Rico’s public debt is greater than that of any US state government, with the exception of New York and California. Its total $70 billion debt is held as bonds mostly owned by US mutual funds and hedge funds.
Governor Alejandro Garcia Padilla may argue that maintaining essential services for the island’s 3.5 million Americans is more important, justifying the use of funds from the bonds for various municipal activities, but Puerto Rico is clearly desperate to deal with the situation.
The Recovery Act
Lawmakers of Puerto Rico enacted the Recovery Act in 2014 to enable the island’s debt obligations to be met. This was because the territory has been precluded from bankruptcy measures applying to other US states since 1984, when Congress excluded the island from the provisions of the US bankruptcy law. Till then it had been treated just like any other state with regard to bankruptcy measures. Because of the 1984 amendment, the Supreme Court has ruled that the US territory has no authority to restructure public debt as per the federal bankruptcy rules in spite of two court justices arguing that the amendment of 1984 was never intended to isolate Puerto Rico when it needed debt restructuring.
With the Recovery Act struck down by the Supreme Court, Puerto Rico has to rely on the US Senate where a bill to create a federal control board to deal with the territory’s debt is waiting for a favourable vote. The bill has been passed by the House of Representatives with an overwhelming majority, and now the White House is eager for the Senate to pass this quickly. Once that’s done, it can be signed into law by President Barack Obama before Puerto Rico’s debt payment due date on July 1.
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