Puerto Rico is staggering under a $72 billion public debt load that its governor has said the U.S. territory cannot pay and must restructure. The island has missed a debt payment and its worsening economic crisis has spooked investors who fear it’s headed toward default, with no options for a bailout or bankruptcy declaration. Here’s a brief explanation of how Puerto Rico accumulated so much debt, how its territorial status complicates matters and how it could emerge from a nearly decade-long economic slump.
A TROPICAL TERRITORY WITH SNOWBALLING DEBT
Puerto Rico became part of the U.S. in 1898 and the commonwealth gained limited political autonomy when the U.S. Congress approved its constitution in 1952. Some argue that Puerto Rico’s convoluted political status has hastened to its economic decline, because it receives less federal funding than U.S. states and must get congressional approval for certain actions as it tries to manage its debt. Coffee and sugar once fueled its economy, and as agriculture diminished, Puerto Rico got an economic boost from federal tax incentives that lured manufacturers, especially pharmaceutical companies, from the U.S. mainland. Congress phased out those incentives by 2006. Puerto Rico’s economy then fell into a tailspin that only worsened after the wider U.S. economy nearly collapsed in 2008. Government spending continued unchecked as borrowing covered increasing deficits. Puerto Ricans, as U.S. citizens, can move freely to the U.S. mainland, and about a third of all people born on the island now live there, leaving behind a withered tax base.
BANKRUPTCY IS NOT AN OPTION
Puerto Rico’s debt has now tripled in just 15 years. Like all U.S. states and territories, it cannot declare bankruptcy under federal law, though mainland municipalities and their public utilities can. Puerto Rico’s public utilities are heavily indebted and Alejandro Garcia Padilla’s administration is pushing for their right for to file for bankruptcy. The proposal has no support from Republicans in control of Congress, which must sign off. Garcia signed a debt-restructuring law last year, but a federal judge ruled it unconstitutional after two major U.S. companies representing bondholders sued.
WHAT HAPPENS NOW?
The White House says a federal bailout is not under consideration. Commonwealth officials say negotiations with creditors have begun as the government finalizes a five-year fiscal reform plan. Meanwhile, Puerto Rico’s government could face lawsuits if it continues missing debt payments. The island’s Public Finance Corporation already missed a $58 million bond payment in August, its first ever. The government warns that its general fund could run out of money by year’s end. The governor has signed an executive order to divert revenue from some agencies to meet current debt payments and avoid a shutdown of basic services. The island’s justice secretary has said some might regard the move as a technical default since officials are diverting money slated for future debt payments. Statehood supporters say the economic crisis shows why Puerto Rico must become the 51st U.S. state; independence proponents say it supports their cause. Economists say Puerto Rico must boost its tourism sector and modernize its infrastructure. The Obama administration has proposed a territorial bankruptcy regime and would impose new oversight on finances, expand Medicaid benefits and allow residents to qualify for the same low-income tax credits that are offered to other American citizens through the Earned Income Tax Credit.