Puerto Rico has filed for a form of bankruptcy in a desperate bid to stave off creditors and maintain essential services to its 3.4 million citizens, nearly half of whom live in poverty.
Analysts lauded the decision by the insolvent US territory, which owes more than $70bn (£54bn) in public debt, as a way for the island to “bring the debt back to sustainable levels, protect vulnerable communities and promote transparency”.
But others – including Donald Trump, the US president – have deemed it little more than a bailout, with numerous Republicans in Congress demanding to know what went so wrong.
“If Puerto Rico were a country, it would be the 13th most indebted country in the world,” said Eric LeCompte, executive director of Jubilee USA, an NGO that focuses on debt relief.
“But this shows there really is some light at the end of the tunnel. This [bankruptcy] process is the first to deal with 100% of the [public] debt. It’s unique in that it may set a precedent for how sovereign debt can be renegotiated in the world.”
Puerto Rico’s status as a US territory means that it is unable to restructure its debt as a state would, by invoking chapter nine of the US bankruptcy code.The government is instead initiating the insolvency process under the Puerto Rico Oversight, Management, and Economic Stability Act, a bill signed into action by former president Barack Obama, which calls for the bankruptcy case to be heard by a US federal judge.
It is unclear how much of the debt would be restructured in court and what would be left to negotiate with bondholders. A fiscal plan indicates that Puerto Rico will now pay $800m a year in repayments, less than a quarter of what it owes, which has upset creditors.
Puerto Rico’s governor, Ricardo Rosselló, who announced the move on Wednesday after failing to convince creditors to accept a deal, said the territory had no other choice. “We have reached this decision because it protects the best interests of the people of Puerto Rico,” he said in a statement.
A recession spanning decades – prolonged by the departure of multinational manufacturers, including “big pharma” companies – and the extensive brain drain to the US mainland has left Puerto Rico with arrears worth nearly 70% of its GDP. Unemployment is twice that of the US and millions depend on costly government programmes such as Medicaid.
On Friday, the Associated Press reported that Puerto Rico was closing 184 public schools in a bid to save millions of dollars. About 27,000 pupils will be relocated to other schools when the academic year ends this month.
LeCompte said the restructuring could become a future example of how best to manage debt relief, particularly in developing countries that have high arrears and no means of paying them back.
“This [could] promote transparency and enforce audits so we have a better understanding of what happened in Puerto Rico and how we got into this mess,” he said. “This is affecting an island where nearly 60% of the children are living in poverty – real, developing-world poverty, which is different from poverty in the mainland United States.”
But creditors have a very different view of the bankruptcy announcement, with some warning Puerto Rico could become “the next Argentina,” and others declaring it amounts to “outright theft”.
Jon Borschow, a native Puerto Rican who created the Foundation for Puerto Rico, an NGO focusing on socioeconomic development, said the crises made filing for bankruptcy inevitable, but could spell a better future for the island.
“We see a moving away from the export of physical goods, as we have done in the past, to the production of what we call ‘innovation’ – the export of knowledge, technology and service, basically 21st-century exports,” said Borschow.
“That’s in the long term. In the short to medium term, we need to develop Puerto Rico as a destination, because we are a remarkably attractive destination for visitors from all around the world, and we believe we can readily double our visitor count over the next five years, generating an additional $7bn over that period.”
Yet the most significant point raised for many Puerto Ricans has not been about solvency, but sovereignty. Washington is often seen as little more than a stick-wielder, and the island is often referred to as a colony by its inhabitants. Conversations about Puerto Rico becoming the 51st state – or a nation in its own right – have once again been stoked.
“The fundamental problem is territory status and inequality, and the economy will not reach its potential until Puerto Rico is treated equally among the states,” said Republican Congressional representative Jenniffer González earlier this year. She has filed a bill to make the island a US state by 2025.
“We have a territorial status on the island, without being a nation and without being a state, so we are kind of in limbo.”
- This article was amended on 6 May 2017 to correct the debt figure in the subheading to $70bn, not $70m as stated in an earlier version.