Puerto Rico in uncharted waters as historic bankruptcy process begins

Saddled with a $123-billion US debt, Puerto Rico heads to court Wednesday in the largest government bankruptcy proceeding in recent U.S. history. With 45 per cent of people living in poverty and residents moving away in droves, the U.S. territory is hoping to fend off economic collapse.

U.S. federal judge to begin sorting out $123B debt in a San Juan court on Wednesday

Demonstrators protest against the government's austerity measures in San Juan, Puerto Rico, on May 1. The sign reads: 'Open your eyes, reflect, join us.' The U.S. territory has declared bankruptcy and will be in court Wednesday to try to get out from under its $123 billion US debt. (Alvin Baez/Reuters)

Inside a courtroom in San Juan, Puerto Rico, today, the largest government bankruptcy proceeding since that of Detroit will get underway as the U.S. territory looks to get out from under a crippling $123 billion US debt.

Puerto Rico is using a process that's never been tried before and one that will be watched closely by its residents and financial markets around the world.

Like U.S. states, Puerto Rico was unable to declare bankruptcy, but that changed in 2016 when the Obama administration, fearing a humanitarian crisis after a decade-long recession in the territory, passed a law called the Puerto Rico Oversight, Management and Economic Stability Act, better known by its acronym PROMESA. 

Edwin Melendez speaks at a recent conference for the Puerto Rican diaspora in New York City. He says the U.S. territory has been struggling to overcome an economic crisis that could cause a humanitarian crisis as well. (Steven D'Souza/CBC)

Under Title III of PROMESA, once Puerto Rico declares bankruptcy, a federal judge is appointed to oversee bankruptcy proceedings, with all creditors given equal footing. 

"I think that by centralizing and co-ordinating all the litigation against the government in one process, it's the best possible outcome we could have at this point," said Edwin Melendez, director of the Center for Puerto Rican Studies at the City University of New York. 

Laura Taylor Swain, a district judge from New York with a background in bankruptcy law, will be the judge presiding over the proceedings Wednesday.

"They're just starting the process, but we're hopeful the debt that Puerto Rico owes can be brought to a level that will be sustainable for the island," Melendez said. 

All creditors will 'take a similar haircut'

The process is designed to protect the island from predatory hedge funds, says Eric Lecompte, executive director of Jubilee USA, a religious development coalition, who consulted on the drafting of PROMESA.

"This process does not allow for holdouts. It does not allow for predatory actors, and it forces everyone to be working through the same process to take a similar haircut," he said.

"The reality is things are still going to be very hard for the people of Puerto Rico, but it's very likely they're going to get the debt relief they need, and it's going to be an unprecedented amount of debt relief." 

Eric Lecompte says the bankruptcy laws passed by Congress last year for Puerto Rico will help the territory avoid having its fate decided by predatory hedge funds and Wall Street money managers (Steven D'Souza/CBC)

Still, Lecompte cautioned, the situation in Puerto Rico will get worse before it gets better. Currently, 45 per cent of residents live below the poverty line, and unemployment is more than double the U.S. rate. The economic crisis has forced the government to shut down schools, and many workers fear their pensions will disappear.

Recession and deficit spending at fault

The debt, $74 billion in bonds and $49 billion in unfunded pension liabilities, is the result of a recession that dates back to 2006 and a government that continually borrowed to pay the bills. 

"Right now, we don't have a clear path of where we're going, what is going to happen. We're living day by day on the island right now," said Jeannette Garcia, an activist with Unidos Contra PROMESA, a group opposed to the bankruptcy legislation.

We don't have confidence in what is going to happen.- Jeannette Garcia, activist

She was in New York City recently attending a diaspora conference at the Center for Puerto Rican Studies. Her coalition of activists, like the protesters who marched through the streets of San Juan this May Day, want a public audit of the territory's debt. 

"We don't have confidence in what is going to happen, because this is a judge from New York that might represent Wall Street and not see the human and social impact of the crisis," Garcia said. 

Activist Jeanne Garcia says many in the territory oppose the bankruptcy process, and they want a public audit of Puerto Rico's debts to confirm what is actually owed and to whom. (Steven D'Souza/CBC)

On top of the debt, Puerto Rico is also facing a looming health care crisis. The U.S. Congress recently approved $295 million to fund Puerto Rico's massive Medicaid bill, but Frankie Miranda of the New York-based Hispanic Federation says the money will run out in a matter of months. 

"This is an imminent humanitarian crisis, and [we are] hoping we can raise our voices and make sure we can do something," Miranda said.

He said Puerto Rico's Medicaid funding is half of what states get.

Congress 'complicit' in crisis, say some

The health care situation is just one factor that has forced residents off the island: 10 per cent of Puerto Rico's population has moved away in the last decade. 

Garcia says Americans stateside need to pay attention to what's going on in the territory.

"We are American citizens living in Puerto Rico, and what happens in Puerto Rico affects the United States," she said.

Melendez says many in Congress think passing PROMESA was enough, but they need to do more. 

"They were complicit in all the things that led to the crisis," Melendez said. "They looked the other way for many years, and they have not invested resources to really pull Puerto Rico out of the crisis."


Steven D'Souza

Co-host, The Fifth Estate

Steven D'Souza is a co-host with The Fifth Estate. Previously he was CBC's correspondent in New York covering two U.S. Presidential campaigns and travelling around the U.S. covering everything from protests to natural disasters to mass shootings. He won a Canadian Screen Award for coverage of the protests around the death of George Floyd. He's reported internationally from Rome, Israel and Brazil.