Puerto Rico may be nearing the end of bankruptcy. What does this mean?

A program is in place to restructure a huge chunk of its debt.

February 6, 2022, 10:53 AM

Last month, a federal judge approved the largest debt restructuring plan ever reported in the United States, paving the way to end Puerto Rico's long and painful bankruptcy process.

The plan -- capping a years-long debate between creditors and local and federal officials --- reduces the largest part of the island’s largest outstanding debt portion from $33 billion to about $7 billion. Debt originally amounted to $70 billion plus $50 billion in pension obligations.

Puerto Rico’s Electric Power Authority separately owes more than $9 billion. The financial oversight board responsible for extricating the island from bankruptcy expects to have a plan for that debt later this year.

Last week, the longtime executive director of the board, Natalie Jaresko, who helped negotiate the plan, announced her resignation effective in April. She and the board have faced criticism for the length of time it took to negotiate the plan as well as austerity measures imposed in the meantime, but they lauded the deal as a historic step for Puerto Rico's future.

Although the plan is a step forward in moving Puerto Rico out of crushing debt, experts remain concerned about the island’s economic future.

According to the Center for the New Economy’s policy director Sergio Marxuach, the plan is “based on long term projections for the economy, which are very uncertain.”

Economists are expecting an influx of money to reach Puerto Rico in the next five years linked to the recovery efforts from both hurricanes and the earthquakes. But the rest of the economy remains uncertain.

People protest the Debt Adjustment Plan outside the federal court where it is being considered by bankruptcy Judge Laura Taylor Swain in San Juan, Puerto Rico, Nov. 8, 2021.
Carlos Giusti/AP, FILE

“I want to believe that elected officials in Puerto Rico and in the U.S. are concerned that Puerto Rico needs to grow after the reconstruction ends,” economist and professor at the University of Puerto Rico, José Caraballo-Cueto told ABC News.

“The economy is not going to grow by itself, and it's not going to grow jobs based on more fiscal stimulus either by receiving new federal funds or rather by issuing new debt,” Caraballo-Cueto added.

How Puerto Rico’s economy faltered?

Decades of mismanagement and excessive debt led Puerto Rico to file for bankruptcy in 2016 under the Puerto Rico Oversight Management Economic Stability Act (PROMESA). The law, signed by former President Barack Obama, gave the island an alternative because, as a territory, it could not file under Chapter 9, the traditional avenue for financially distressed municipalities.

The year before, the island failed to comply with payments on $70 billion in public debt and more than $50 billion in pension obligations. The pension portion of the debt will not be restructured which means every pensioner is supposed to received what they were promised.

“Puerto Rico’s debt is unpayable,” said former Gov. Alejandro García-Padilla in 2015. Under his administration and President Obama’s last term, PROMESA was imposed, including its Financial Oversight and Management Board.

The board, made up of seven members, is in charge of handling the island’s finances and has received criticism from residents, local and federal officials amid the delay in reaching a consensus that would lead Puerto Rico out of the bankruptcy.

In a statement announcing her departure, effective in April, Jaresko touted her achievements during her tenure.

“I am leaving the Oversight Board at a time of recovery and stability. I am proud of what we have achieved, and I am confident that the road that led us to this milestone will take Puerto Rico further to growth and prosperity,” Jaresko said in a statement.

The board's chair, David Skeel, lauded her work.

“I am saddened by her personal decision to step back but I also understand her desire for a change after five years of rewarding but relentless and difficult work to help Puerto Rico recover from its fiscal and economic crisis," Skeel said.

Jaresko acknowledged, however, "these have been complex years, and the painful natural disasters, political turmoil, and the pandemic added to the hurdles we needed to overcome,"

Months after the board started working on the island, Puerto Rico was slammed by Hurricane Irma and María causing over $90 billion in losses, according to the local government.

Three years later the island got hit again with thousands of earthquakes and the ongoing pandemic — debilitating Puerto Rico’s economy even more.

Natalie Jaresko the executive director of the board is speaks on a public hearing on May 27,2021 at San Juan, Puerto Rico.

What’s next for the island?

Puerto Rico will have to start paying the debt with the hope that the island’s economy will grow independently from the federal aid that is expected to arrive.

“It’s a leap of faith,” Marxuach, from the Center for the New Economy, told ABC News.

“It's a big concern for us, that once this money dries up, we really don't have a, you know, strategic vision, as you know, for growing the economy. And we may go back into a recession,” Marxuach added.

Although many experts are aware the agreement is not perfect and risky, they considered it a step forward in getting Puerto Rico out of the financial crisis.

Under the approved plan, pension obligations were protected, securing many retirees that were fearful of their economic stability.

“I think the positive side of this restructuring was that pensions were protected… and I think that's a big win for the civil society of Puerto Rico,” Caraballo-Cueto told ABC News.

Although he is in favor of fully protecting pensions, Marxuach is concerned what protecting pensions means for the ability to invest in younger generations.

“Protecting the pensions was a good thing but I think about the amount we're going to be paying on pensions every year going forward, which is about $2 billion and think then think about the amount we're going to be putting from the general fund into the University of Puerto Rico, which is only $500 million,” Marxuach says.

As Puerto Rico heads into a new phase of the bankruptcy process, experts are warning that this is just the beginning.

“We're turning the corner and things are starting to look better, but we still have a lot of work to do,” Marxuach said.

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