5 Things To Know About The Puerto Rican Bankruptcy

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Puerto Rico is up to its ears in debt – about $72 billion worth. Now, Governor Alejandro García Padilla, backed by a study he commissioned from former World Bank and IMF officials, argues that the debt is not only unprecedented for a US-linked economy, but virtually unpayable. 

Alejandro García Padilla seeks to convince creditors to develop a restructuring plan, which would include deferrals and extensions on payments. He assured that if creditors “don’t come to the table, it will be bad for them”. “What will happen is that our economy will get into a worse situation and we’ll have less money to pay them. They will be shooting themselves in the foot,” he added.

What is behind the current crisis, and what’s going to happen? Here are five things to know.

1.How Much Is $72 Billion, Really?

Puerto Rico has about 3.5 million people. Per capita, it has more debt from municipal bonds – which localities use to pay for basic services – than any American state. By the end of 2015, it’ll be more than 100 percent of the island’s gross domestic product. The numbers lend obvious credence to the governor’s claim that the debt is “not payable”. 

 2. The Crisis Has Been In The Making For A Long Time.

Image Source: Zerohedge

Since the early 70s, really – as El Nuevo Dia’s graph of Puerto Rico’s debt shows, it’s been steadily on the rise, growing especially steep around the 2000s. The real estate collapse was more severe than on the mainland, and the island has never recovered. But even before that, Puerto Rico was already in recession. As the Guardian notes, an early 2000s construction bubble, driven by infrastructure spending, has long since burstLikewise, investment has been on the wane since 2004. Then, in 2006, a ten-year sunsetting of tax breaks for US manufacturers took effect. It sparked a downturn which has turned into something resembling a depression

The unemployment rate is at 14%, violent crime has increased and the population is bolting for the mainland – including, most crucially for its health care system, many of its medical professionals, who see much smaller reimbursement rates for Medicare and Medicaid than their US colleagues. 

 3. Why Does Its Status As A Commonwealth Matter?

For one, it limits the government’s options. It can’t declare bankruptcy the way Detroit did in 2013, for instance. But as the Guardian writes, it has also made its current troubles more severe. “Vulture funds” specializing in risky bonds with a high payoff own almost a quarter of Puerto Rico’s debt. This is largely because the island’s $72 billion of municipal bond debt is exempt from taxes three times over. And its inability to declare bankruptcy has allowed the funds to take a hardline stance on payments. 

The commonwealth status might also be making it easier for people – and their capital – to leave. Specially if you consider the tough austerity measures passed in recent years and the likelihood that more are on the way.

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4. The World Bank/IMF Report Blames Poor Government Budgeting.

Anne Krueger, the former IMF managing director, led a team of analysts to examine the case of Puerto Rico. Known as the Krueger report, the study analyzed the Puerto Rican government’s revenues between 2004 and 2014. It concluded that they were about 15% less than what the government had been budgeting for. This means that the government had about $1.5 billion less at their disposal every year than they thought. 

The Krueger report proposed a bond exchange to be carried out, in which old bonds be swapped for new ones with a longer and lower debt service profile. This will allow the island to have more time to meet debt obligations, which would also accrue at lighter rates. 

 5. Will The US Government Step In?

The Krueger report’s authors think it should. So does the García Padilla administration. Its advisors want the federal government to pass a reform allowing it to declare bankruptcy. The White House backs that idea, although it has rejected any possibility of a federal bailout. García Padilla is also pushing for the passage of a federal bill that would allow Puerto Rico’s public corporations to declare bankruptcy – of the $72 billion in bonds, the electricity and water agencies issued about $25 billion of them. 

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