Puerto Rico Is On Track for Historic Debt Forgiveness — Unless Wall Street Gets Its Way

For bondholders sitting on Puerto Rican debt, Hurricane Maria may have come just when they needed it, just as a yearslong battle over the fate of the island’s financial future was beginning to turn against them. Or, depending on how the politics shake out, they could see their entire bet go south.

Ahead of Maria, the federally appointed fiscal oversight board now in control of Puerto Rico’s finances had developed a plan that would wipe out 79 percent of the island’s annual debt payments, taking a massive chunk out of the payday hedge funds had been hoping to land from the island.

In the wake of the storm, that fight could go one of two ways: Advocates for Puerto Rico are making the case that the devastation means that 79 percent should be ratcheted up all the way to a full debt cancellation. The hedge funds, meanwhile, see an opening to attack the oversight board and reclaim ownership of the process.

While Congress focuses on the size and shape of the relief package, the battle over the much larger debt — at least $74 billion — is being overshadowed. As hedge funds attempt to undermine the board’s legitimacy in the courts, resentment toward the board from a different end of the political spectrum has made the body unpopular for entirely different reasons: It’s colonial and undemocratic. The difference between the two? The left wants debt relief for Puerto Ricans. Many bondholders want the opposite.

President Donald Trump joined the fray Tuesday evening, indicating that he wanted to erase Puerto Rico’s debt. “They owe a lot of money to your friends on Wall Street, and we’re going to have to wipe that out,” Trump said on Fox News. It wasn’t clear from his statements whether he intended a bailout for Puerto Rico or for its creditors. Office of Management and Budget Director Mick Mulvaney walked back on Trump’s comments to Fox on Wednesday, apparently under the impression it was the latter. He told CNN, “We are not going to bail them out. We are not going to pay off those debts. We are not going to bail out those bondholders.”

As of now, though, the decision on how much debt to cancel legally rests with U.S. District Court Judge Laura Taylor Swain, and any formal forgiveness on the total sum wouldn’t happen for at least a year. Still, motions in the direction of cancellation could be reflected in an update to Puerto Rico’s current fiscal plan, freeing up millions of dollars for both short and long-term recovery efforts.

“Thousands who lost their homes need urgent shelter, and entire towns are suffering from hunger and dehydration. Inefficiency and the depraved indifference of the Trump administration is rising to the level of criminal negligence,” said Xiomara Caro Diaz, a San Juan resident who is the director of New Organizing Projects at the Center for Popular Democracy. Among the group’s demands is a “complete and irrevocable forgiveness of all Puerto Rican public debt,” alongside a call for a robust relief package and to cut red tape around aid distribution.

Any relief package will come with little assistance from the creditors. The Intercept previously surveyed more than 50 of the island’s known creditors, and none had offered more than thoughts and prayers to the island, and few had even gone that far. David Tepper, the hedge fund manager behind Appaloosa LP, recently made a $3 million gift to the relief effort, the lone burst of generosity from creditors to have become publicly known.

In the meantime, Puerto Rico is still trying to climb out of overlapping crises. As Gov. Ricardo Rosselló said in an interview published Monday by El Nuevo Dia, his government could run out of funds as early as this month. It currently costs around $70 million a day to run the government, which has around $2 billion in cash on hand. “But let me tell you what $2 billion means when you have zero collection: It’s basically a month government’s payroll, a little bit more,” Rosselló elaborated.

For the same reasons, the fiscal control board and those paying close attention to Puerto Rico’s financial situation are even more skeptical than they were before the storm that the island can pay back any sizable chunk of its debt. The board met last Friday to reconsider its current fiscal plan for the island in light of storm damage and the revenues likely to be lost as a result, though there are still few details as to what (if anything) was decided. There are also increasing calls for the U.S. government to devote money not just to emergency services but also to general operating expenses, and to help lay the foundation for more resilient infrastructure. A staffer for Puerto Rican-born Rep. Nydia Velázquez, D-N.Y., for instance — one of Congress’s most active members on issues related to the island — told The Intercept that she is requesting that the Treasury extend a line of credit to alleviate Puerto Rico’s liquidity issues.  

Even if the debt is eventually forgiven, the fiscal oversight board will continue to be a presence on the island until the Puerto Rican government maintains a balanced budget for four consecutive years and crafts those budgets in line with the board’s accounting standards. For Puerto Ricans, that could mean austerity measures and a neutered democracy even after the debt is canceled. Yet the hurricane may well have altered the politics around austerity, too, as calls for investment in rebuilding infrastructure could overwhelm the demand for cuts. With increased attention on Puerto Rico after the storm has also come increased outrage over its economic and political crisis.  VAMOS4PR, a coalition of labor, community, and civil rights groups, is planning rallies in 14 cities today calling for “immediate and sufficient aid to RELIEVE AND REBUILD Puerto Rico,” according to a press release, and to zero-out the debt. The event in New York starts just blocks from Swain’s office.

The continued presence of the board, however, also means its privatization agenda could continue to play out long after Puerto Rico’s debts are off the books. (The firm handling the oversight board’s communications declined to comment for this story.)

The trade-off between at least some level of debt forgiveness and undemocratic austerity has been at the core of tensions over the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), which created the oversight board and allows for more expansive bankruptcy proceedings than other U.S. municipalities have access to. (For reasons that remain unknown, Puerto Rico hasn’t been able to declare Chapter 9 bankruptcy like other struggling cities and states since 1984.) When it was passed amid protests last summer, PROMESA put a moratorium on most debt payments that has been in place ever since, though Rosselló has attempted to repay portions of it. Since it was installed, the board has begun outlining and implementing deep cuts to the commonwealth’s public sphere.

In some ways, the oversight board acts as a kind of mediator between bondholders and the government and people of Puerto Rico, preempting some of the most draconian terms built into bond repayment contracts, now on hold under PROMESA and as the bankruptcy-like negotiations the bill outlines proceed in the courts. One such provision would have mandated that the government pay back general obligation bonds before providing essential services to its citizens. Though repayment is still on hold, different classes of bondholders are now locked in a legal dispute about which of them is entitled to the revenue from the island’s sales tax, currently set at 11.5 percent. A board-rejected debt restructuring agreement would have mandated that rates automatically rise when demand goes down to satisfy repayment, meaning that, thanks to PROMESA, fewer customers would have to pay drastically higher bills.

Though the board does provide a considerable buffer between bondholders and Puerto Rico, for many residents the body represents just the most blatant iteration yet of the United States’s colonial relationship to the island, which has officially been a U.S. commonwealth since 1952. The arrangement usurps any semblance of local democracy and wrests virtually all decision-making power from the people and to a body that’s only required to have one Puerto Rican member.

Creditors oppose the board for very different reasons. Sensing at least some level of forgiveness on the horizon — and generally frustrated that the board has moved debt negotiations to the courts so quickly — creditors have launched a series of lawsuits aimed at delegitimizing the board and winning more of their money back. Cate Long, who leads a research service for Puerto Rico bondholders and wrote a recent report for Congress on the status of PROMESA, has been circulating a list of recommendations to lawmakers in Washington in Irma and Maria’s wake, calling for Congress to “consider a tax credit for U.S. multinationals” and the “militarization of the island to provide short to medium [term] security.” The list further suggests that “Congress … proactively request that President Trump remove … and replace the [board] with an appointed administrator who has broad authority to execute contracts, coordinate with federal agencies and oversee reconstruction.”

In an email to The Intercept, Long wrote, “[The oversight board] is seven volunteers who live all over the US and cannot coordinate easily with all the federal agencies, Congress and White House. They are not prepared for the magnitude of rebuilding Puerto.” The U.S. military, she added, “needs to supplement the 15,000 Puerto Rican police officers to maintain law and order.” Long also said she would be recommending to Congress that U.S. multinationals operating in Puerto Rico be able to write down 100 percent of capital expenditures “required to rebuild after Maria or build new factories within a 2-3 year window.”

Perhaps the biggest existential threat to the control board, which the document above references, is a suit launched by hedge fund bondholder Aurelius Capital Management. Filed in August, the Aurelius suit alleges that the board bypassed the Constitution’s “appointments clause,” a statute mandating that principal officers of the federal government be appointed by the president and then approved by the Senate. Should the case gain traction, it could put debt repayment back on creditors’ terms.

The creditors have good reason to be nervous. “At this point,” Jubilee USA Executive Director Eric LeCompte says, “no investor in Puerto Rico’s debt should be thinking that they will get any return in the near future.”

Controversially, Jubilee USA supported PROMESA in the lead-up to its passage last summer, causing tension between the group and other civil society organizations aligned against the measure. As they have in similar kinds of debt negotiations, Jubilee USA is now calling for the cancellation with complete restructuring of Puerto Rico’s debt, and has been tracking developments there and in Washington closely.

“Now that the hurricanes have happened, and we understand the level of devastation that has taken place on the island, the bankruptcy process that’s in place under Swain now has to take into account this new reality,” LeCompte tells me. “For Puerto Rico, that means a much bigger haircut than we were looking at beforehand.” 

According to LeCompte, there are a couple of ways that forgiveness or cancellation could play out. Beyond outright forgiveness, one idea that’s been popular even among some bondholders is to repackage any remaining debt into a bond that would only be repaid once Puerto Rico crosses a certain threshold of GDP growth. A less likely scenario — though one LeCompte advised to look out for, and Trump himself may have suggested — could see Congress pass a bail-out for bondholders, pouring federal funds into recouping their losses. Another recourse for creditors, he tells me, “is trying to get Congress to amend or change PROMESA legislation to disempower the bankruptcy process.”

LeCompte, though, says signals now are stronger than they’ve ever been for cancellation or deep forgiveness — thanks both to Maria’s devastation and to active pressure from Puerto Rican organizers there and in the diaspora. “In a financial crisis, you’re killing people slowly,” he says, “When these hurricanes hit — when there’s no electricity and no power — you’re watching people get killed quickly.”

Correction: Oct. 4, 2017, 2:11 p.m.
An earlier version of this story incorrectly stated that Puerto Rico has officially been a U.S. commonwealth since 1898. Puerto Rico became a commonwealth in 1952. 

Top photo: Irma Maldanado stands with Sussury her parrot and her dog in what is left of her home that was destroyed when Hurricane Maria passed through on Sept. 27, 2017 in Corozal, Puerto Rico.