On May 3, 2017, in an unprecedented move, the Fiscal Oversight Board requested for bankruptcy-like protection under Title III of the PROMESA Act.
The petition was made in Puerto Rico’s federal district court after members of the FOB determined that this was the best option to solve Puerto Rico’s debt crisis. According to law, this request needed at least the approval of 5 members of the FOB. Nevertheless, the decision was approved by all members of the FOB.
In a press release from the FOB, the Chairman of the Board, “emphasized that this Title III filing should not preclude efforts to continue voluntary debt restructuring negotiations and seek consensual agreements with creditors” (see press release here).
Title III is part of the PROMESA Act that was enacted in June 2016, as a request to the federal government to intervene in the fiscal crisis that has affected the island since 2006. The Act creates a Fiscal Oversight Board that is responsible for helping Puerto Rico to achieve fiscal responsibility and access to the capital markets (see PROMESA Act).
PROMESA also creates two mechanisms with which to restructure its debt. The first is under Title IV, which establishes a procedure for negotiation between creditors and the government. The second option is under Title III, which gives the government the opportunity to file a bankruptcy-like case in the federal court. In a case under Title III, the government of Puerto Rico is represented by the FOB.
After the May 1st deadline, in which the stay on litigations from creditors ended, there was an expectation for the approval of Title III. Concerns were raised about the inaction of the government and FOB to not to file for this mechanism that was fought to be included in the PROMESA Act. In a statement, Congresswoman Nydia M. Velázquez, and other labor leaders and advocacy organizations urged the FOB to implement Title III. They feared that in the absence of an orderly court proceedings, creditors will have the opportunity to claim government assets and as a result affect the people of Puerto Rico adversely.
A day after the end of the stay, bondholders and insurance companies filed a couple of lawsuits against the government of Puerto Rico and the Fiscal Oversight Board demanding a payment of the debt. At the same time, then want to annul the fiscal plan that was approved by the FOB, and prevent the implementation of Title III of PROMESA (see debt restructuring). Now a judge will preside over the case and determine the amount of debt relief that Puerto Rico will receive.
In an opinion piece, economist Juan Lara, UPR professor and member of the Centro Roundtable on Puerto Rico, presents the problems that Puerto Rico could face in the debt restructuring process. He talks about several studies that look at different cases in which countries restructured its debt. In addition, he talks about two studies which evidence that countries with a high poverty rate and countries that have struggled economically, have achieved the biggest cut of their debt. In the case of Puerto Rico’s economy, which has stagnated for more than ten years and with its pensions and health care system struggling, a substantial cut of its debt could happen. According to the Lara, what prevents this from happening is that Puerto Rico’s debt is part of United States municipal bond market, and it could create a precedent for other jurisdictions. For Professor Lara, “It is not reasonable to think that a judge is going to tilt the scale of Justice only to our side [Puerto Rico].”