June 2015 – PUERTO RICO – The U.S. territory of Puerto Rico is just days away from a historic economic collapse after the commonwealth’s governor said the island cannot pay its $U.S. 72 billion ($93 billion) in debts. Governor Alejandro Garcia Padilla, who took office two years ago, said on Monday that the government’s attempts to slash expenditures and restructure its debt have failed. An analysis by former World Bank and International Monetary Fund officials “for the first time acknowledges the true extent of the problem.” With several massive payments looming in the coming weeks, Mr. Padilla scheduled a media conference to address the situation. On the weekend, Mr .Padilla told The New York Times that the government’s finances were “in a death spiral” and that “the debt is not payable.”
The inability of the U.S. territory to repay its debt, combined with the financial crisis in Greece, would have far-reaching implications for financial markets. Morningstar, an investment research firm based in Chicago, estimated in 2013 that as much as 80 per cent of Puerto Rico’s debt has found its way into muni-bond funds, and 180 mutual funds in the U.S. and elsewhere have at least 5 per cent of their portfolios in Puerto Rican bonds. Puerto Rico, which became a territory of the US in 1898 after a war with Spain, cannot legally file for bankruptcy, as U.S. cities such as Detroit have done when faced with similar fiscal crises. The island’s constitution, however, states that Puerto Rico must make its debt payments before it pays for any other government services, leaving the island in a fiscal limbo if it cannot make its payments.
Since taking office, Mr. Padilla has worked with the island’s development bank to restructure the debts owed by different government agencies. But that was a tall task for an island that began borrowing large sums of money in the 1970s to boost a lagging economy. Municipal bonds are already exempt from state and local taxes, and Puerto Rican bonds enjoyed the added benefit of being exempt from federal taxes as well. That “triple-tax-free” status made the territory’s bonds incredibly popular to investors. From 2000 to 2012, the government’s public debt nearly tripled from $US24 billion ($31 billion) to $US70 billion ($91 billion), according to the Centre for a New Economy in Puerto Rico. That left the island’s governments inundated by debt payments. Combined with thousands of Puerto Ricans leaving the island for the US every year and a constantly sputtering economy, credit agencies lowered Puerto Rico’s bond rating to near-junk status and warned of a full fiscal collapse.
Mr. Padilla responded by trying to cut everything, from basic government services to cell phone use by his employees. David Chafey, chairman of the board of the Government Development Bank of Puerto Rico, announced his resignation last week. Mr. Padilla is expected to ask Puerto Rico’s creditors, and its residents, to “share the sacrifices” needed to get the island back on firm legal ground. –SMH