schiffgold.com / BY SAMUEL BRYAN / JULY 21, 2016
Efforts to solve the Puerto Rican debt crisis have already run off the rails.
Late last month, Congress passed a bill allowing Puerto Rico to restructure its debt. Under the plan, the US territory essentially declared bankruptcy. The US government won’t expend funds to bail out Puerto Rico, but will allow the island’s government to pay back debtors at less than 100%. Although the bill doesn’t say so explicitly, for all practical purposes it created a bankruptcy process for the island.
Even with the agreement, Puerto Rico still defaulted on a $1.9 billion payment in principle and interest that was due July 1. Under the Puerto Rican constitution, bondholders were supposed to get first claim on government funds. At the time, Puerto Rico Governor Alejandro Garcia Padilla said the commonwealth could not raise enough money to cover the payment even if he completely shut down the government.
Fast forward to today and we find the Congressional fix has already started to unravel. The congressional plan put Puerto Rico under the guidance of a federal oversight board. But the law featured a built-in lag of at least two months before the board is put in place. Meanwhile a group of hedge funds have sued the country. They claim Gov. Alejandro García Padilla is exploiting the lag by spending hundreds of millions of public dollars on “purposes that apparently enjoy political favor,” According to the New York Times:
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