With all the news surrounding Puerto Rico’s struggle to recover from Hurricane Maria, you’ve probably heard mention of this U.S. Territory’s financial struggles. During his recent visit, Donald Trump suggested that Puerto Rico’s massive debt should be wiped out. This news might leave some wondering how can a government could just have their debts wiped away. But what many don’t realize is that Puerto Rico’s previous financial struggles led its leaders in May 2017 to file for what could be considered the equivalent of federal bankruptcy protection.
The Title III Restructuring Process
Puerto Rico filed for debt restructuring through a special program designed by Congress specifically for distressed U.S. Territories. When Puerto Rico filed for debt protection in May, it owed $74 billion in debts and an additional $49 billion in pension liabilities. This financial protection was needed as it became increasingly difficult for the island to provide basic services such as health care and public safety.
So, Could Puerto Rico’s Debt Be Totally Wiped Out?
When Trump told Fox News, “They owe a lot of money to your friends on Wall Street and we’re going to have to wipe that out,” he may have spoken with good intentions, but the situation is a little more complicated. He doesn’t have the direct power to control the island’s debt restructuring. A federal oversight board is in charge of negotiating with Puerto Rico’s creditors to reduce its debt. However, while it’s unlikely, the only thing that Trump could do with his executive power is convince Congress to approve a federal bailout to pay Puerto Rico’s debt.
Another possibility is that creditors might feel pressured to quickly work through the debt negotiating process because of the political momentum in aiding Puerto Rico’s recovery from the hurricane. This could help Puerto Rico recover sooner as they navigate through their bankruptcy.