Puerto Rico Debt Crisis

How Puerto Rico Debt Is Grappling With a Debt Crisis

Erika P. Rodriguez for The New York Times

For years, Puerto Rico borrowed money by issuing municipal bonds, using the funds to compensate for declining government revenue and prevent deep cuts in services and layoffs of public workers. It easily found investors.

But Puerto Rico can no longer afford what it owes. The island is reelingunder more than $70 billion of debt, and officials there have warned about its inability to pay back investors while maintaining essential services for residents such as health care and schools.

This is what’s happening and how the island got here:

What’s the latest?

Puerto Rico’s Gov. Alejandro Garcia Padilla suspended nearly $2 billion of debt payments that the island was supposed to make on Friday even after President Obama signed a financial rescue bill for Puerto Rico late Thursday.

The actions come amid protests on the island, which is reeling from more than $70 billion of debt. Washington has put Puerto Rico’s finances under the watch of a federal oversight board, and the rescue plan allows for the restructuring of some of the island’s debts. The plan drew plenty of criticism from both sides of the political aisle, though Treasury Secretary Jacob Lew had urged lawmakers to act.

Two weeks ago, the Supreme Court rejected Puerto Rico’s attempt to allow its utility companies to restructure their debt, leaving it to Congress to finalize a rescue plan for the island’s fiscal woes. The House passed its version of the bill earlier this month.

The island skipped a $399 million debt payment due May 2, but the defaults have continued to escalate. Puerto Rico has been struggling with a prolonged recession, with rising unemployment and declining business that has led hundreds of thousands of residents to move to the United States mainland.

What’s being done about fixing the problem?

For months, the Obama administration has pressed Congress to put together a solution for Puerto Rico. Gov. García Padilla enacted a law in early April that allows him to block debt payments and preserve the island’s dwindling cash. He has already invoked that power.

We have repeatedly traveled to Washington to convey the urgency of the situation. So far, no action has been taken.

Gov. Alejandro García Padilla

But Washington’s rescue bill takes precedent.

Puerto Rico’s Government Development Bank, one of the island’s biggest debtors, has been negotiating with some of its bondholders to pay them at less than 100 cents on the dollar.

Fights brewing among various types of bond investors could greatly complicate things if Congress does not act in time. Some of Puerto Rico’s bonds have guarantees or constitutional priority, and those investors are pushing for full payment. Other investors are pushing for early settlements, hoping they can recover more in private negotiations than a court-ordered one.

The rescue plan’s restructuring provisions would also apply to Guam, American Samoa, the Northern Mariana Islands and the U.S. Virgin Islands, if necessary in the future.

 

How did the situation get this bad?

This is not just a matter of financial liabilities and litigation. The human costs for the 3.5 million Americans in Puerto Rico are real. And they are escalating daily.

Treasury Secretary Jacob J. Lew in a May 2 letter to Congress.

Much of the debt is in the form of municipal bonds, issued by the Puerto Rico government and its various agencies and utilities, to help cover revenue shortfalls and current expenses.

The debt was tax-exempt for investors throughout the United States and paid higher yields than other munis, making it attractive to scores of retail bond mutual funds. Hedge funds and other risk-seeking investors also piled in as the island’s financial woes mounted.

That helps explain how Puerto Rico amassed such a mountain of debt, but there were other crisis factors at play. Corporate tax breaks designed to spur economic growth for Puerto Rico expired in 2006, and manufacturing and other business activity began to leave the island. When jobs started leaving,people followed or lost their jobs, reducing Puerto Rico’s tax revenue. The government filled the gaps by borrowing even more.

Unlike American cities such as Detroit, Puerto Rico isn’t allowed to file for a court-arranged bankruptcy reorganization. And unlike sovereign nations such as Greece, it can’t seek emergency assistance from the International Monetary Fund. That is why it has asked Congress to give it extraordinary powers to reduce its debt outside of bankruptcy.

  1. How is Puerto Rico different from a state?

    Puerto Rico is a territory of the United States. It is a distinction that, for years, has carried many of the advantages of being a state and few of the downsides. Most notably, Puerto Rico receives federal assistance, but most of its residents do not pay federal personal income tax.

    But the lack of statehood status is now hurting the island at its time of greatest need. Health care is a large and growing part of its economy, but the federal government reimburses its doctors and hospitals at lower rates than if it were a state, for example. That prompts its doctors to leave for the mainland. And unlike cities or counties on the mainland, Puerto Rico can’t simply file for bankruptcy.

  2. Photo
    A market in San Juan. At the beginning of May, Puerto Rico’s government defaulted on a $399 million payment. Some state and local governments on the United States mainland may be veering toward similar fates. CreditErika P. Rodriguez for The New York Times
    How does this affect you?

    Residents of the island might have to brace for budget cuts for services like schools, hospitals and Zika virus containment efforts. At some point their taxes could go up.

    On the mainland, the effects of the crisis are still largely isolated to the bond market, which doesn’t show widespread signs of stress. There are indications, however, that investors are steering clear of known trouble spots, such as Chicago’s school district.

    The bigger issue might be the effect on towns and states that have serious budget imbalances and are looking at Congress’s solution for Puerto Rico as a road map for getting some form of help for themselves. Critics of any sweeping debt reductions say allowing Puerto Rico to go back on its bond promises could put a chill on investment in American municipal debt, raising the cost of borrowing–and of roads, bridges and other public works–for struggling cities.

    What’s the political fallout?

    House Speaker Paul Ryan made a Puerto Rico rescue package a priority, using it as a way to showcase his ability to gain bipartisan support. He eventually succeeded in getting a bill passed, at the urging of the Obama administration, but Mr. Ryan’s earlier request for a bill by a March 31 deadline came and went.

    The crisis may become an issue in the election year campaigns, especially in Florida, which is home to a large population of Puerto Ricans who have left the island since the economic slowdown began. Lawmakers have stressed that the plan to rescue Puerto Rico was not a taxpayer bailout.

     

Support the Will County News when you shop on Amazon