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Blue Island on the Brink
Puerto Rico Nears Default

A number of Puerto Rico’s bondholders are meeting in New York this week to discuss the increasingly real possibility that they may not be paid back. Like Detroit before it, Puerto Rico has been spiraling toward default for years now, but unlike Detroit, Puerto Rico’s status as a territory will make it legally impossible for the island to enter bankruptcy. Instead, it’s beginning to look like the island will issue a moratorium on its debt repayments until it figures its situation out. Unfortunately, Puerto Rico’s debt crisis is so bad that it’s not clear what more the government can actually do to fix it, as the FT notes:

Puerto Rico is likely to struggle to lift taxes much more. According to a document due to be presented at Thursday’s meeting, Puerto Rico’s debt per capita is more than $14,000, while income per capita is almost $17,000, a ratio of 83 per cent. California, Illinois and New York each have a debt to personal income ratio of 6 per cent, according to the document.

Puerto Rico’s unemployment rate of 14 per cent is more than twice the national average.

To his credit, Governor Alejandro Garcia Padilla has taken some serious steps to shore up the territory’s finances, including a landmark reform of the teacher pension program, shifting things to a defined-contribution scheme that would require higher contributions from teachers. Unfortunately, the Supreme Court of Puerto Rico has halted the implementation of this reform as it prepares to hear a challenge to the law from the teacher’s unions. Garcia had some harsh words for the decision:

“The resolution emitted by the Supreme Court is particularly dangerous in this historic moment in which we live because our will to save the teachers pension system is being evaluated in relation to the country’s credit rating,” the governor said in a prepared statement.

“The times call for intellectual generosity and historic responsibility from the judicial branch,” he added.

Puerto Rico is quickly shaping up to become the next Detroit. And if it does default, the fallout could be even messier.

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  • free_agent

    You write, “Puerto Rico’s status as a territory will make it legally impossible for the island to enter bankruptcy.”

    What are the odds that Congress amends Chapter 9 of the bankruptcy code to permit territories to declare bankruptcy? That seems like the only solution other than the territory unilaterally declaring that it won’t pay a fraction of its debts.

  • William Ockham

    Where were the bond rating agencies, Moody’s, Fitch and Standard and Poor’s, when all this happened? A situation like Puerto Rico’s where It’s debt is 83% of per capita personal income (while California, Illinois and New York are at 6%,) must have developed over decades. Why weren’t Puerto Rico’s bonds rate at junk grade ten or twenty years ago? This would have prevented their receiving credit and getting in this crisis? Or is just like the AAA ratings on the subprime mortgage CDO’s?

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