Tuesday, September 28, 2021

Debt Moratorium Act May Prove Valid Despite Constitutional Challenge

By on April 7, 2016

While the recently enacted law that would allow the governor to declare a debt moratorium may violate the Puerto Rico Constitution, it is defensible in court under the current circumstances of the commonwealth’s fiscal crisis, legal experts said.

Sergio M. Marxuach, Director for Policy Development at the Center for the New Economy.

Sergio M. Marxuach, Director for Policy Development at the Center for the New Economy.

Sergio Marxuach, policy director for San Juan-based think-tank Center for the New Economy, said the governor chose the best alternative at this juncture, even though he acknowledged the move sets a bad precedent. Marxuach added there were only three alternatives on the table: pay the debt, which would have left the government without money for services; go into default and risk having its funds frozen, or declare a moratorium and go against the Puerto Rico Constitution.

“The governor made the right decision,” he said.

In four weeks, the government will have to deal with the possible insolvency of the Government Development Bank (GDB) and a major default. The GDB owes $422 million on May 2, while the government must pay $1.5 billion in general obligation bond payments in July.

The implementation of a debt moratorium could spur a slew of lawsuits against the government, because it would constitute a violation of contractual obligations protected by the local and federal constitutions. The commonwealth’s constitution establishes a priority of obligations that must be paid first for situations in which revenues are not enough to operate the government, with general obligation payments and interests at the top of the list.

“The moratorium is indeed a violation of the clause that protects contractual obligations covered under the Puerto Rico and U.S. Constitutions, but none of those rights are absolute nor operate in a vacuum,” said Carlos Ramos, a constitutional law professor from Inter-American University Law School.

The government, Ramos noted, could argue that, while the Constitution establishes a priority of debt payments and protects contractual obligations, the territory also has the obligation under the Constitution of ensuring the welfare of citizens.

“The clause that protects contractual obligations is not absolute, because there are emergency situations that call for such contracts to be violated,” he added. “In the absence of an agreement with creditors, the government can say that it had no other choice but to violate the contract because it also has the duty to protect the welfare of its citizens.”

The constitutional lawyer argued that while the U.S. District Court and the First Circuit Court of Appeals have not been sensitive to the actions the Puerto Rico government has carried out to deal with its fiscal crisis—such as when they declared the local bankruptcy law unconstitutional—he believes things could change in the future.

He said that the best way to deal with the situation in the coming weeks will be to pay part of the debt or its corresponding interest when it becomes due, as some political leaders have suggested, and to continue to negotiate debt restructuring with creditors.

“In the short term, there is no other choice but to take some emergency measures to protect basic services like education,” he added.

Puerto Rico has 18 different kinds of debt, each with its own characteristics. To make matters worse, the government has not been completely open about the nature of its obligations.

Walter O. Alomar Jiménez, a constitutional law professor at the University of Puerto Rico Law School, said that public comments about defaulting or not paying brings problems because it causes more downgrades and more government mistrust. He said the commonwealth Constitution already states that all constitutionally guaranteed debt must be paid first above all other things, so he rejected any calls for a moratorium of debt payments.

“The best thing the government can do in the next weeks is to establish a dialogue with financial markets. Creditors and banks can reduce interest payments and carry out other payment plans; but the government has to speak clearly,” he said. “There has to be transparency. We have a serious, large debt that must be restructured.”

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