Bowing to grim fiscal realities, on June 28 Puerto Rico’s Governor Alejandro García Padilla signed into law a plan for the the unwinding of state-owned enterprises—a law that most saw as preparation for the looming default of the Puerto Rico Electric Power Authority (PREPA). The law would give the government nine months to negotiate with creditors and, if no settlement was agreed upon, would allow Puerto Rico’s courts to impose one.The response from the markets was swift, with Moody’s cutting Puerto Rico’s ratings, traders dumping bonds, and major institutional investors lining up with suits arguing the new law is unconstitutional.PREPA has some $8.6 billion in liabilities, and had a bill for about $671 million coming due by the end of August. The violent reaction from the markets rattled the firm’s foundations further, and it was unable to make some of its payments on its revolving lines of credit at the start of July. Yesterday, those creditors granted PREPA a short reprieve, giving it until July 31 to make good on its obligations.As the Economist notes in its writeup on the situation from last week, we are in uncharted territory if PREPA defaults:
No one knows what would happen then. Puerto Rican state agencies fall in a gap in America’s bankruptcy code: they are excluded from the regimes both for local governments and private firms. As a result, missed payments would probably set off a whirlwind of litigation.
Puerto Rico’s collapse has been like watching a car crash in slow motion. Recent events suggest, however, that things are about to speed up in a big way.