Puerto Rico is facing its first lawsuit over how the U.S. territory’s government has diverted funds to meet certain bond payments as its liquidity dwindles amid a worsening economic crisis.
The lawsuit filed late Thursday by Assured Guaranty Corp. and Ambac Assurance Corporation claims the government violated the U.S. constitution by diverting tax revenues meant to back certain bonds and used them instead to finance general obligation bonds, which have higher priority.
“At this time we have no choice but to protect our stakeholders through judicial recourse,” Nader Tavakoli, Ambac’s CEO and president, said in a statement. “The Commonwealth has committed itself to a ‘scorched earth' strategy of blaming its fiscal and structural problems on lenders, Congress and others, in an effort to deflect responsibility and obtain retroactive application of bankruptcy laws.”
The two New York-based companies and their affiliates insure nearly $8 billion of the territory’s debt, according to the lawsuit filed in the U.S. District Court of Puerto Rico. The companies claim the government illegally diverted at least $163 million when it had other available resources to pay part of its debt.
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Gov. Alejandro Garcia Padilla said Friday that the lawsuit will provoke other creditors to rush to court. He warned that Puerto Rico does not have the legal structure to deal with such lawsuits and called on U.S. Congress to provide the island with a restructuring mechanism.
“It’s a shame that Congress, which responds to Wall Street lobbyists, has ignored Puerto Rico’s crisis and instead opted to allow the island’s 3.4 million U.S. citizens and its creditors to descend into chaos,” he said.
The lawsuit was filed about a week after Garcia announced that the government would meet $594 million in bond payments due this week but would default on $37 million in interest on bonds issued by Puerto Rico’s Infrastructure Financing Authority. Ambac claims the default is a result of the government diverting funds and noted that it made a timely payment on some $10 million of claims tied to Infrastructure Financing Authority bonds that it insures.
Garcia has warned there is no money available for future payments, including $400 million due in May in bonds issued by the Government Development Bank.
Puerto Rico is struggling through a nearly decade-long economic stagnation and faces $72 billion in public debt that Garcia has said is unpayable and needs restructuring.
U.S. House Speaker Paul Ryan, a Republican from Wisconsin, has promised the House will come up this year with “a responsible solution” for Puerto Rico’s debt problems. Meanwhile, the U.S. Supreme Court is hearing an appeal on a ruling that barred Puerto Rico from giving municipalities the power to declare bankruptcy.