Rhodes on Puerto Rico: ‘It’s exactly like Detroit’
Lansing — The governor of debt-ridden Puerto Rico has hired the retired federal bankruptcy judge from Michigan who handled Detroit’s historic bankruptcy for advice on shedding billions of dollars in debt.
Retired U.S. Bankruptcy Judge Steven Rhodes is one of a handful of key figures from Detroit’s bankruptcy who are now engaged in Puerto Rico’s debt crisis.
Puerto Rico Gov. Alejandro Garcia Padilla is warning that the U.S. commonwealth cannot repay nearly $72 billion in debt it owes, including unfunded pension liabilities in excess of $30 billion.
The Caribbean island’s $72 billion in debt is four times the $18 billion in debts and long-term liabilities Detroit claimed in July 2013 when the city became the largest U.S. municipality to declare bankruptcy. In November, Rhodes approved Detroit’s plan to shed $7.4 billion in debt.
Rhodes said Monday that Puerto Rico needs the relief of bankruptcy, but federal law doesn’t allow commonwealths or states to seek Chapter 9 protection from creditors.
“I don’t see a practical way for the commonwealth to negotiate with all of the bond creditors it has all over the country and all of the different kinds of bond creditors it has,” Rhodes said in a telephone interview with The Detroit News.
Puerto Rico’s tax-free municipal bonds have been popular with U.S. investors because of the higher interest rates the commonwealth has been shelling out to keep its government afloat amid a decade-long economic slump.
“It’s exactly like Detroit,” said Rhodes, who retired in February from the U.S. Bankruptcy Court in Detroit.
Rhodes was in Puerto Rico on Monday, speaking to the commonwealth’s legislators about Detroit’s bankruptcy and attending the presentation of a new report by international economists scrutinizing the island’s economic and financial challenges.
Former New York Lt. Gov. Richard Ravitch, who was an unpaid adviser to Rhodes in the Detroit bankruptcy, said Monday he recommended the Puerto Rican governor hire Rhodes as an adviser. Ravitch also is advising the Puerto Rican government.
“It’s the same tragic mistake that’s been made everyone else — they borrow money and most politicians would rather borrow than raises taxes,” said Ravitch, who was one of the architects of the 1975 financial rescue of New York City that kept the Big Apple out of bankruptcy court. “Puerto Rico got away with it for a long time.”
There is a lobbying effort in Congress to let the island seek bankruptcy protection from its creditors.
“It is clearly desirable, and the hedge funds are fighting it tooth and nail,” Ravitch said of bankruptcy. “The situation in Puerto Rico is so complicated, legally and politically and every which way.”
The Puerto Rican government also is consulting with a group of bankers from Citigroup who were involved in restructuring Detroit water and sewer bonds during the bankruptcy, Ravitch said.
Former state Treasurer Andy Dillon, who was deeply involved in Detroit’s financial crisis from 2011 to late 2013, also is working for Puerto Rico’s Government Development Bank through his employer, Conway MacKenzie, according to Ravitch.