Puerto Rico hit with lawsuits after litigation freeze ends

People carry a large Puerto Rican flag as they protest looming austerity measures amid an economic crisis in San Juan Puerto Rico on Monday. The May Day demonstrations come as the island faces a Monday deadline for reaching a deal on debt payments or

The previous largest US public bankruptcy, Detroit's in 2013, covered some $18 billion in debt.

Puerto Rico Governor Ricardo Rossello announced that the USA territory will restructure part of its $70 billion debt load, a move that is similar to declaring bankruptcy.

Rossello said negotiations with bondholders had failed, forcing the government to seek relief through a bankruptcy-like move available under Title III of a federal law called Promesa.

In July 2016, then president Barack Obama signed the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), which establishes a financial control board to restore fiscal discipline on the island. The gap between US state pension assets and benefits promised to public employees climbed to $1.1 trillion in 2015, Pew Charitable Trusts said in a report last month. Gov. Rossello announced on Wednesday, May 3, 2017, a historic restructuring of a portion of the USA territory's $70 billion debt through courts after negotiations with bondholders failed.

"I'm not going to allow that to happen", he said.

Should the bankruptcy proceed, the process would be similar to court-mediated debt restructurings common for other entities in the United States. He said he did not yet have details on the breakdown of those debts. At that time, the City of Detroit was in debt to the tune of around $19 billion.

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Puerto Rico's collapse also shows the pressure than can emerge when retirement systems run out of cash.

While it was not immediately clear just how much of Puerto Rico's $70 billion of debt would be included in the bankruptcy filing, the case is sure to dwarf Detroit's insolvency in 2013. While state finances are largely on the mend and officials have dismissed any suggestion they would ever push lawmakers for the same legal recourse, the path ceded to Puerto Rico has fostered speculation it may one day look attractive to governments at the end of their financial ropes. Puerto Rico has defaulted on $1.3 billion in principal payments since August 2015, roughly a month after the previous governor declared that the island's public debt was unpayable and called for a restructuring.

A federal district court judge will now be in charge of determining how Puerto Rico's debt will be restructured. Bondholders can not challenge Rossello's decision until 120 days from now.

Puerto Rico has been negotiating with creditors, mostly investors who bought distressed Puerto Rican bonds at a discount in the hope of making a profit by demanding full payment or something close to it. Island officials have been working with a federal control board set up under the restructuring law adopted a year ago. The people of Puerto Rico have had enough.

Municipal bankruptcies are rare, given that governments have the power to raise taxes to satisfy their debts. "In short, Puerto Rico's crisis has reached a breaking point". House Natural Resources Committee Chairman Rob Bishop, R-Utah, who led last year's negotiations to create the financial oversight board, said that body must be given space to work: "We've got the pieces in place". The inevitable bankruptcy of Puerto Rico has finally arrived, sort of.

Puerto Rico's situation is more dire than Detroit's because the city, in part, had a firm set of rules in bankruptcy court, an option that the USA territory doesn't have, said Greg Clark, head of municipal research at Debtwire.

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