Will Congress Let Chaos Prevail? Countdown to Chapter 9 for Puerto Rico
Published on December 14, 2015
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:
- The Spanish and English versions of the Puerto Rico Constitution have different wordings with respect to the payment of GOs.
- The Puerto Rico Constitution does not specify the remedies available to GO bondholders.
- The protection of COFINA funds from a clawback has not been ruled upon by any court of law.
- Are municipal tax revenue streams subject to the Constitutional Clawback?
- Is the claim of bondholders over the revenues of public corporations subordinated to the payment of their operating expenses?
In our opinion, Puerto Rico’s most urgent need at this moment is a legal framework to restructure its debt in a fair and orderly manner under the supervision of a federal bankruptcy court. The next few days provide a small window of opportunity for a constructive resolution. It would be catastrophic for Congress not to take full advantage.
For its part, it behooves the government of Puerto Rico not only to speak clearly and with one voice about its resolve to put the people of Puerto Rico first, but also to stop its damaging penchant for irresponsible financial gimmickry such as the recent confiscation of tax refunds, as well as the poorly thought-out proposal of a debt-exchange which hinges on the pollyannaish notion that creditors will quickly and voluntarily accept less than what they are owed. These ill-conceived distractions do nothing but frustrate and foil the genuine and achievable options on the table.
This is a situation of great urgency that can no longer be postponed. Congress must act to adopt the White House proposal now, or face greater chaos with fewer options later.
Though we face a dire state of affairs, we believe we are also before the best opportunity San Juan and Washington have had in almost a century to craft a political and economic arrangement equal to that centenary challenge.
Success in that arena, however, will depend on three principles vital to any response to this political and humanitarian crisis.
First, the response from Washington must be comprehensive. Piecemeal efforts will be insufficient and both parties in this crossroads can ill-afford a short-term solution that only kicks the can down the road for a year or two. It is vital that an appropriate and systemic civic infrastructure for Puerto Rico be developed and implemented with a long-term horizon. This is a challenge not for the government, but for the citizen sector to undertake in partnership with philanthropic institutions from Puerto Rico and the mainland, as well as the Puerto Rican diaspora.
Secondly, whatever concessions Washington provides must be conditioned on specific requirements from Puerto Rico. Seven decades of political deterioration have made enlightened statecraft virtually impossible in Puerto Rico. Only through the use of external leverage will we be able to wrest the rudder of government from the skeletal hands of ideology and inertia.
Finally, Puerto Ricans must be the principal architects of our long-term reconstruction blueprint. No plan imposed from Washington will ever have the support needed to make it successful, much less enduring and legitimate. As important as the short-term measures are, it is this long-term growth plan that must ultimately take center stage.