Will Congress Let Chaos Prevail? Countdown to Chapter 9 for Puerto Rico

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As Washington debates whether or not to approve access by Puerto Rico to some version of Chapter 9 of the U.S. Bankruptcy Code, the negative implications of a disorderly default looms large on the horizon of both island residents and bondholders.

An analysis by CNE of Puerto Rico’s “insanely convoluted” debt structure has found that without recourse to Chapter 9, Puerto Rico bondholders will face a myriad of unresolved legal issues which anticipate protracted litigation, a complex maze of claims and counterclaims, and years of nonpayment. Among the key open issues that will affect bondholders claims are the following: READ MORE

What A Debt Default Would Look Like Without Chapter 9 (related documents)

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As the clock ticks for Puerto Rico, what would a debt default look like without the recourse of Chapter 9 of the U.S. Bankruptcy Code? With all probability, players will face years of nonpayment, an utterly complex maze of claims and counterclaims, protracted litigation, and a myriad of open, unresolved legal questions.

In the following paper, CNE analyzes Puerto Rico’s “insanely convoluted” debt structure, and finds that very few players will benefit from the chaos of a disorderly default. We will detail some of the consequences of a default on Puerto Rico’s debt and consider some of the principal arguments in favor of allowing Puerto Rico to avail itself of the debt restructuring process under Chapter 9 of the U.S. Bankruptcy Code.

Scroll down for the following documents:
– Puerto Rico Debt: A Survey of the Landscape- Introduction[1]
– Puerto Rico Debt Analysis[2]
– Executive Summary: Puerto Rico Debt Analysis[3]
– Resumen Ejecutivo: La estructura de la deuda[4]
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Chapter 9 for Puerto Rico: Necessary but not Sufficient

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By: Sergio M. Marxuach

Introduction

Puerto Rico has experienced severe economic problems for several years now. Its economy has been contracting or stagnant at least since 2006, and unemployment, poverty, and inequality levels are extremely high, especially when compared with the fifty states in the mainland.

To put the situation in perspective, note that Puerto Rico’s per capita income is one-third of United States’ and close to one-half of that of the poorest state, Mississippi; its poverty rate is 45% in comparison with 15% in the United States as a whole; and 37% of its population receives nutritional assistance, while only 13% of the population in the fifty states receives such assistance.

In addition, the island has been running budget deficits for the past fifteen years, tax evasion is rampant, government corruption pervasive, the informal economy massive, its real economic productive base weak, and perhaps most important, Puerto Rico’s economy is essentially a mirage based on high consumption levels that have been sustained by a monetary illusion, that is, by having access to a stronger currency—the U.S. dollar—than its economic fundamentals would warrant.

Notwithstanding this dismal economic situation, the island managed to triple its public debt from $24 billion in 2000 to $72 billion in 2015. Indeed, during this period Puerto Rico’s public indebtedness grew at a compound annual rate of 7.6%, while its national income (GNP) grew at a nominal rate of only 3.5%. Given that Puerto Rico’s indebtedness has grown at an average annual rate that is two times faster than the growth rate of its GNP during the past fifteen years, it should not be surprising that Puerto Rico’s total public debt currently exceeds its GNP.

Recently, the governor of Puerto Rico announced that the island’s public debt of $72 billion, equivalent to 103% of its GNP, was “unpayable” and needs to be restructured. We at CNE agree that Puerto Rico needs to restructure at least a portion of its debt.

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