Puerto Rico and the Netherworld of Sovereign Debt Restructuring

Abstract

Puerto Rico has incurred debt well beyond its ability to repay. It attempted to address its fiscal woes through legislation allowing the restructuring of some its debt. The Supreme Court put a stop to this effort, holding that Congress in the Bankruptcy Code barred the Commonwealth from enacting its own restructuring regime. Yet all agreed that the Bankruptcy Code did not provide anything in its place. While Congress quickly enacted PROMESA in an attempt to address the Puerto Rico’s fiscal ills, we explore in this paper whether Congress has the power to bar Puerto Rico from enacting a restructuring mechanism and not offer an alternative. We submit that the answer is no. When it comes to a state, the Supreme Court has held that the power to issue debt necessarily implies the power to restructure that debt. Congress can preempt that power, so long as it puts something in its place. To preempt and leave nothing, however, runs afoul of our federal system. The same reasoning, with greater force, applies to Puerto Rico. The federal government entered into a compact with the citizens of Puerto Rico, granting them, among other things, the power to issue debt. Puerto Rico implicitly received the power to restructure this debt. Congress could offer a substitute to any regime that Puerto Rico might enact, but it cannot leave the Commonwealth without any means to address its fiscal affairs.