1. NS4540 Winter Term 2016 Puerto Rico Default

2. Overview Oxford Analytica, Puerto Rico: Default Signals Further Slide In 2016, January 6, 2016 Standard & Poor’s downgraded Puerto Rico’s Infrastructure Finance Corporation rum-secured bonds to D from CC -- with a negative outlook Island’s government and public agencies hold 72 billion dollars of debt obligations but Migration to the mainland United States, Political unwillingness to cut spending, and Constitutional difficulties have triggered a severe crisis Federal U.S. and Puerto Rican lawmakers are concerned that austerity-driven cuts to public services would only exacerbate the problems of the commonwealth 2

3. Impacts II The island’s government opted for a “slow motion” default by redirecting funds to most of its commitments, apart from 35.9 million dollars held by the Puerto Rico infrastructure financing Authority (PRIFA), and 1.4 million dollars held by the Public Finance Corporation (PFC) The island’s government withheld these funds as part of a “clawback” mechanism prioritizing payment of constitutionally protected general obligation debt over other forms of public debt (general obligation bond – common municipal bond that is secured by state or local government’s pledge to use legally available resources, including tax revenues to repay bond holders). 3

4. Restructuring Routes I Puerto Rico lacks a clear legal route for bankruptcy – does not hold Chapter 9 protections enjoyed by US states The Legislative Assembly passed the Puerto Rico Public Corporation Debt Enforcement and Recovery Act allowing restructuring in June 2014, but bondholders brought legal challenges The Act was deemed constitutionally incompatible with the federal US Bankruptcy Code and was struck down by the federal district count for Puerto Rico Congressional Democrats, the island’s government and President Obama signaled support for extending Chapter 9 protections to Puerto Rico as part of the omnibus spending package of December 2015 Republicans blocked restructuring provisions in the final text. 4

5. Congressional Intervention I The slow motion default route was chosen partly in the hope that the US Congress could be prompted into producing an emergency legislative remedy House speaker Paul Ryan has set a deadline of March 31 for congressional action due to up-coming U.S. election Some federal action might be forthcoming if worsening social crisis with spill-over to the maianland US and the prospect of destabilization of the entire market in tax- exempt municipal bonds However this is unlikely to take the form of legislated “super-chapter” restructuring provisions for the island’s 72 billion dollars of public debt 5

6. Congressional Intervention II More likely outcome is: a package providing limited financial assistance, and extending Chapter 9 bankruptcy protestations to Puerto Rican public agencies. Republicans are likely to insist on the creation of a federal fiscal oversight board charged with Cutting spending and balancing the island’s finances Placing restrictions on the island’s ability to borrow Set a budget should the island’s government fail to align spending with income. However, legislative, executive and judicial initiatives are uncoordinated. The independent momentum of Puerto Rico’s debt crisis may trigger a litigation bandwagon that overtakes federal efforts to alleviate the island’s fiscal and social woes. 6

7. Puerto Rico Status Ruling U.S. Supreme court is expected to issue a ruling (Pueblo de Puerto Rico vs Sanchez Valle) clarifying whether the federal government and the Commonwealth of Puerto Rico are separate sovereigns Supreme Court of Puerto Rico ruled that the sovereignty claimed in the 1952 Puerto Rican constitution was subordinated to the actions of the U.S. congress If the Sanchez Valle ruling is upheld by the US Supreme Court it would support the view that the island’s current unincorporated status is a self-governing US territory Two political parties, PNP (pro-statehood) and the PPD, current governor, (status quo) PPD argues that island’s population has never approved statehood Moot point because Republicans in Congress not likely to approve statehood 7

8. Impacts The Puerto Rican diaspora in Florida may punish Republicans at the ballot box in the event of federal inaction Anti gun-control riders may sink congressional efforts to aid Puerto Rico in March Relief for Puerto Rico may become a vote-winning issue for Democratic presidential candidates in the party primaries 8

9. Conclusions 9 With few signs of fresh initiatives from Puerto Rico’s political class Further deterioration in public services this year is likely Washington may produce a limited form of debt relief Costly litigation over restructuring remains probable Austerity measures and additional tax and free increases will accentuate the downturn and increase incentives to leave island In 2015 Puerto Rico lost 60,706 residents If policymakers remain paralyzed, financial and migratory outflows, particularly to Florida may accelerate to crisis proportions producing unpredictable political repercussions in mainland US politics.