Puerto Rico warned Friday that a lawsuit by insurers of its defaulted debt would plunge the US territory into a "litigation crisis", exacerbating its deep economic and financial problems.
Three days after it defaulted on a small part of its $70 billion in borrowings and warned of further defaults in the coming months, the heavily indebted Caribbean island was sued by bond insurer Ambac Financial Group.
Ambac said in the suit, filed Thursday in the US district court in Puerto Rico, that the Puerto Rican government had illegally "clawed back" or diverted revenues reserved for certain bond payments to be used to pay the government's general obligation (GO) bonds.
Ambac argued that such a move is only permitted if the government does not have other resources for the GO bonds.
However, it said in a statement: "For fiscal year 2016, the commonwealth forecasts approximately $9.0 billion of available resources, which vastly exceeds debt service on the public debt of approximately $1.85 billion."
Puerto Rico missed $37 million in payments on debt from small state-controlled units on Monday. It also "clawed back" some $163 million of reserved funds, using the money to make another nearly $1 billion in payments that were due January 4, including $328.7 million in GO bonds.
Ambac said those defaults had forced it to pay out $10 million in claims to bond investors.
Instead of negotiating with creditors, Puerto Rico "has committed itself to a 'scorched earth' strategy of blaming its fiscal and structural problems on lenders, Congress and others," said Ambac chief executive Nader Tavakoli in a statement.
But Puerto Rico Governor Alejandro Garcia Padilla said Friday that, absent a strong legal framework for settling the island's debt problems, the litigation will exacerbate the island's "humanitarian crisis."
"With no legal framework to handle this impending litigation crisis both the commonwealth and its creditors will soon face the opposite of due process and rule of law," he said in a statement.
He renewed his call for the US Congress to pass legislation that would permit the territory to enter bankruptcy protection, providing a framework to restructure all its finances.
"Congress can still prevent this humanitarian crisis from spinning out of control by immediately enacting The Puerto Rico Emergency Financial Stability Act of 2015 introduced in December," he said.