Posted On June 13, 2017 By In Articles With 502 Views

The Incredible Cost of Going Broke

Puerto Rico’s road to financial freedom is cripplingly expensive. Already, as Bloomberg News reported Monday, the island has spent as much as $154 million to financial consultants and lawyers as it grapples with its unpayable $74 billion of debt. And that was incurred mostly before it filed for a bankruptcy-like restructuring in May.


And that bill is going to rise substantially. It’s easy to see Puerto Rico incurring more than $400 million in additional fees as it works through a complicated web of debt. This is a shame from many perspectives; that money could easily pay for the annual pensions of tens of thousands of Puerto Rico retirees, not to mention schools, hospitals, roads and police officers. Creditors wouldn’t mind seeing a little more in their pockets. But this is not a screed against greedy lawyers and consultants. This dispute clearly won’t solve itself, as parties have failed to reach an agreement out of court. And outside professionals won’t work through the labyrinthine issues involved unless they’re paid. The question now is the price tag.

Deflated Expectations

To get a sense of how large Puerto Rico’s legal fees could become, it makes sense to look at recent history. While there isn’t a ton of precedent when it comes to municipal bankruptcies, Jefferson County, Alabama, and Detroit serve as some examples. In both those cases, the total amount paid in fees approached 1 percent of the total debt involved.

For Jefferson County, the legal and advisory charges incurred after it filed to restructure $4.23 billion of debt in 2011 were about $30 million as of the end of 2014. For Detroit, the costs to restructure its $18 billion of debt amounted to about $177.9 million, according to court filings reported by Bloomberg News.

Puerto Rico is much more extreme in every way. The amount of debt is staggering, more than four times as much as Detroit’s. And Puerto Rico has sold debt through more than a dozen different entities, with different streams of revenue backing different slices of debt, so it’s a lot more complicated.

Depressing Statistics

If Puerto Rico’s legal bills amounted to just 0.75 percent of its total debt, it would have to pay out roughly $555 million in total, or about $400 million more than it has already incurred. This is the unfortunate path on which the island and its creditors are stuck.

The key now is to try to expedite all proceedings and limit the painful charges. Creditors shouldn’t be entirely surprised that such a complicated web of debt would be costly to untangle. Residents of Puerto Rico will continue to suffer. In this case, unfortunately, it will cost a lot of money to keep being miserable.

Source: Bloomberg

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