Puerto Rico is in the midst of a financial crisis. Over the past few years, its public debt skyrocketed while its government revenue sharply declined. In order to address its economic problems and to avoid mass public-worker layoffs and cuts in public services, the unincorporated U.S. territory issued billions of dollars in face value of municipal bonds. These bonds were readily saleable to investors in the United States due to their tax-exempt status and comparatively high yields.
Now, however, Puerto Rico is unable to service its extraordinary public debt and has begun to default. While the specific causes of this crisis can be debated, the U.S. Supreme Court in Puerto Rico v. Franklin California Tax-Free Trust, No. 15-233 (U.S. June 13, 2016) recently confirmed that two restructuring tools are unavailable to Puerto Rico and its distressed municipalities: relief under Chapter 9 of the U.S. Bankruptcy Code and local legislation providing for the nonconsensual restructuring of municipal indebtedness.
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