Puerto Rico has asked for a form of bankruptcy protection to help it grapple with more than $70 billion in public-sector debt.
Ambac also filed three other lawsuits, one against U.S. Treasury Secretary Steve Mnuchin seeking a lien on rum taxes that his department collects and later remits to Puerto Rico. By comparison, the USA city of Detroit had $9.3 billion of obligations when it filed for bankruptcy in 2013 in the biggest US municipal bankruptcy ever.
The move, announced by the governor and then followed by a filing in USA court in San Juan, came after he and his predecessor both failed to persuade the island's major creditors to accept less than they're owed and the government faced an onslaught of new lawsuits stemming from a series of defaults.
There are multiple reasons for Puerto Rico's troubles, analysts, officials and residents say, including decades of poor fiscal management and the failure to build the tourism industry to its full potential.
The territory also has almost $50 billion of unfunded pension obligations.
But don't call it a "bankruptcy", exactly, since the territory isn't technically eligible for the same Chapter 9 protection as states. The island's previous government declared the debt unpayable and the territory began a series of multimillion-dollar defaults in August 2015, which prompted Congress to pass the restructuring law past year.
Promesa, signed into law last June, includes an oversight board aimed at helping the island manage its public finances. Ambac argued that Puerto Rico has illegally diverted rum tax revenue slated for bondholders. US cities, notably Detroit, have obtained favorable rulings in recent chapter 9 proceedings that helped them chop down obligations to Wall Street. "But the underlying principles are the same". Title III, which is similar to the Chapter 9 bankruptcy, allows Puerto Rico and other USA territories to restructure their debt under the supervision of a federal judge. "While it is regrettable that Puerto Rico is facing a bankruptcy-like process to resolve its historic fiscal challenges, this was certainly an option of last resort". Or did you grow up in Puerto Rico and then leave? Since 2007, the Commonwealth said it has seen a 14 percent decline in gross national product, a 23 percent decrease in employed persons and a 10 percent drop in population. Any write-downs also would impact bond insurers Assured Guaranty Ltd., MBIA Inc. and Ambac Financial Group, which have guaranteed billions of dollars of Puerto Rico's bonds.
Introduced in 2016, the legal provision invoked by the governor would allow Puerto Rico to restructure its debt if San Juan fails to reach an agreement with its creditors.
The turmoil, and potential misdeeds, in Puerto Rico are sure to put pressure on auditors in other states and municipalities to demand greater transparency regarding financial statements, and to take bigger reserves and write-offs on their balance sheets.
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