Can bankruptcy save Puerto Rico’s state-run corporations?

By Michael A. Fletcher

Policymakers in Puerto Rico’s capital, San Juan, have struggled to deal with the country’s massive debt. (AP Photo/Ricardo Arduengo)

Puerto Rico is buried under at least $73 billion in debt that has left its economy in a near perpetual recession and caused a significant number of its residents to relocate to the mainland. Worse, the island’s status as a U.S. territory leaves it legally unable to reorganize its staggering debt in bankruptcy.

But a bill before Congress would change that—somewhat. The measure would give Puerto Rico’s state-run corporations, which provide crucial services such as water and electricity and are responsible for a sizable chunk of the government’s overall debt, the same bankruptcy protections enjoyed by cities throughout the United States.

Melba Acosta Febo, president of Puerto Rico’s Government Development Bank, told a House subcommittee Thursday that granting the island’s public corporations bankruptcy protection would be best for everyone involved. The corporations would not necessarily exercise the option, she cautioned, but if they did, debtors would face a clearer path than if the corporations simply run out of money. The island’s residents would not have to deal with a possible spike in already sky-high utility rates and possible interruptions of service that could result from the corporations toppling into receivership. Also, the future growth of the territory could be ensured by freeing up financing so the island could invest in more efficient power plants and other infrastructure.

Absent a way to reorganize its debt, the island is left in “an environment of uncertainty that makes it more difficult to address Puerto Rico’s fiscal challenges and threatens Puerto Rico’s economic future,” Acosta said.

Earlier this month, a federal judge threw out a local law that would have allowed Puerto Rico’s highway, water and power companies to restructure about $20 billion in debt. …read more