SAN JUAN Puerto Rico sought relief on Wednesday under a law enacted to help the United States commonwealth restructure its massive debt load, paving the way for what could be the largest-ever bankruptcy case involving a USA local government entity.
Puerto Rico's situation is more dire than Detroit's because the city, in part, had a firm set of rules in bankruptcy court, an option that the US territory doesn't have, said Greg Clark, head of municipal research at Debtwire.
The US territory of Puerto Rico announced they intend to file for bankruptcy, making the island commonwealth the largest US municipality to file for protection from creditors in history. Since this process has never been used before, there is no real precedent for the case - meaning that whomever Roberts appoints for the job will have a great deal of control over Puerto Rico's future.
"The government's liquidity and insolvency problems are enormous", said José Carrión, the chairman of the board that's overseeing the territory's debt restructuring.
The outcome of the case could have implications for financially troubled USA cities or states.
The announcement came a day after major creditors sued Puerto Rico over defaults to its bonds.
Rossello said one of the lawsuits sought to claim all revenues generated by the island's Treasury Department for bondholders.
"It's going to be uncomfortable for some", Barbarosh said. Meanwhile, the process to restructure the debt in court will continue, said Elias Sanchez, the governor's representative to the board. He said he did not yet have details on the breakdown of those debts.
The largest municipal bankruptcy was roughly $18 billion owed by the city of Detroit in 2013.
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The process will give Puerto Rico the legal ability to impose drastic discounts on creditor recoveries, but could also spook investors and prolong the island's lack of access to debt markets.
Puerto Rico has approximately $74 billion of bond debt and $48 billion of unfunded pension liabilities.
A federal district court judge will now be in charge of the restructuring.
Some bondholders are expected to file legal challenges to Rossello's decision but can not do so for 120 days.
Some expect creditors to challenge the filing, arguing the board did not meet requirements under PROMESA to conduct good faith negotiations out of court.
"When a line is crossed, the government has to act in favor of the people of Puerto Rico".
For a time, the strategy worked - but the introduction of ill-advised "Free Trade Agreements" in the 1990s caused those companies to move to low-wage countries, resulting in a high unemployment rate and a "brain drain" as Puerto Rico's best and brightest moved to the mainland, eroding the country's tax base.
It set up a bankruptcy-like process tailor-made for Puerto Rico. As Jeff Mazzella, the group's president, sees it, the oversight board's action "will allow Puerto Rico to rob millions of American retirees and savers who invested in Puerto Rico bonds".