Puerto Rico's governor yesterday called for the commonwealth to be allowed to restructure its debts under U.S. Bankruptcy Code, while a newly appointed adviser to the U.S. territory said it is "insolvent" and will soon run out of cash, Reuters reported yesterday. Governor Alejandro Garcia Padilla, in a televised address, said sacrifice must be shared by bondholders, as he called for Washington, D.C., to allow a bankruptcy debt restructuring. The Caribbean island is struggling to relieve a $73 billion debt burden. It came to a crunch point yesterday after a dire report on its stability by former International Monetary Fund economists was released ahead of key deadlines on Wednesday to repay debt. Former Bankruptcy Judge Steven Rhodes, who oversaw Detroit's historic bankruptcy and has now been retained by Puerto Rico to help solve its problems, gave a blunt assessment yesterday. Puerto Rico "urgently needs our help," Judge Rhodes said. "It can no longer pay its debts, it will soon run out of cash to operate, its residents and businesses will suffer," he added. Puerto Rico's bonds skidded yesterday as investors sought greater compensation amid the heightened risk. Puerto Rico is not eligible for chapter 9 restructuring under the Bankruptcy Code because it is not a municipality. Rhodes said the island's future hinges on gaining eligibility for debt restructuring, while stressing that bankruptcy would not be a "bailout." Read more.
In related news, the declaration by Puerto Rico’s governor that the island’s $72 billion in debt is “not payable” was not only a warning to its creditors, but also aimed at leaders in Washington, D.C., but the federal response was relatively reserved yesterday, the New York Times reported today. The White House made it clear that Puerto Rico would not receive a “federal bailout” but expressed some support for an effort to allow the island’s public corporations to use federal bankruptcy protections. Puerto Rico is not allowed to authorize chapter 9 bankruptcy as a U.S. commonwealth. But the push in Congress for chapter 9 faces stiff opposition from many Republicans, particularly conservatives, who say that allowing Puerto Rico to restructure its debts in bankruptcy would amount to a free pass for decades of fiscal mismanagement by local government officials. Read more.