AP EXPLAINS: Puerto Rico's struggle with B of public debt

Associated Press

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.


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. 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.


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; however, 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.


The White House says a federal bailout is not under consideration. Commonwealth officials say serious negotiations with creditors could begin once a five-year fiscal reform plan is submitted by Aug. 30. 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 this month, its first ever. The government warns that its general fund could run out of money by November. 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. Puerto Rican leaders say if the territory could be exempted from the Jones Act of 1920 – which mandates that only ships owned, built and operated in a U.S. state can carry cargo to and from the island – it would gain maritime jobs, reduce its debt and lower its cost of goods, especially oil.

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