Monday, May 8, 2017

Puerto Rican Debt Crisis

The Puerto Rican debt crisis is an ongoing financial crisis related to the amount of debt owed by the government of Puerto Rico. The island has more than US$70 billion of outstanding debt, with a debt-to-GDP ratio of about 68%. In February 2014, various American credit rating agencies downgraded the government's debt to non-investment grade.

The crisis has caused Puerto Rico's government to adopt policies that will ideally reduce costs drastically, increase revenues, and spark economic growth so that it can better fund its debt obligations. Puerto Rico's economy has been described as precarious, weak, and fragile, and aggravated by social distrust and unpleasantness.

On August 3, 2015, Puerto Rico defaulted on a $58 million bond payment to the Public Finance Corporation, a subsidiary of the Government Development Bank, while other financial obligations were met.

In June 2016, President Barack Obama signed into law the PROMESA, which empowered him to appoint an Oversight Board that has ultimate control over the Commonwealth's budget and its debt restructuring. The Oversight Board extended a moratorium on debt collection lawsuits by creditors until May 1, 2017. Creditors sued as soon as the stay expired, and on May 3, 2017, the Commonwealth sought the quasi-bankruptcy protections provided by PROMESA


Beginning with Christopher Columbus's arrival on the island in 1493, Spain colonized Puerto Rico. In 1898, Puerto Rico was ceded to the United States, at the end of the Spanish–American War. The United States then refused to pay the colony's creditors, asserting they held odious debt.

Prior to 1898, the people of Puerto Rico had Spanish citizenship; after Puerto Rico stopped being part of Spain, the people of Puerto Rico effectively lacked citizenship from a sovereign country: they were neither Puerto Rican citizens, nor American citizens, nor Spanish citizens. In April 1900, President William McKinley signed the Foraker Act, which allowed popular election of only the House of Representatives of Puerto Rico.

In the Insular Cases, the Supreme Court of the United States, determined that the United States Constitution does not fully apply in Puerto Rico because it is an "unincorporated" United States Territory, meaning that it would not necessarily become a U.S. state.

The U.S. Supreme Court reaffirmed Puerto Rican citizenship in Gonzales v. Williams (1904), which denied that Puerto Ricans were United States citizens and labeled them as non-citizen US nationals. This ruling effectively protected Puerto Ricans from conscription in the United States. In March 1917 and while preparing to enter World War I, President Woodrow Wilson signed the Jones–Shafroth Act, which gave Puerto Ricans citizenship of the United States and allowed popular election of the Senate of Puerto Rico. After the President declared war in April 1917, many Puerto Ricans were then drafted.

The Jones-Shaforth Act exempted Puerto Ricans from paying federal income tax and provided a tax credit that allowed U.S. companies to effectively operate on the island tax free. The Act exempted interest payments from bonds issued by the government of Puerto Rico and its subdivisions from federal, state, and local income taxes (so called "triple tax exemption") regardless of where the bond holder resides. This right made Puerto Rican bonds attractive to municipal bond investors. This advantage differs from the restriction typically imposed by municipal bonds enjoying triple tax exemption where such exemptions solely apply for bond holders that reside in the state or municipal subdivision that issues them.

This factor led Puerto Rico to issue bonds that were always attractive to municipal investors, regardless of Puerto Rico's account balances. Puerto Rico thus began to issue debt to balance its budget, a practice repeated for four decades since 1973. The island also began to issue debt to repay older debt, as well as refinancing older debt possessing low interest rates with debt possessing higher interest rates. In 1984, Congress explicitly forbade Puerto Rico from declaring bankruptcy under Chapter 9, Title 11, United States Code.

Between 1996 and 2006, Congress eliminated the tax credits, causing the island to lose 80,000 jobs, its population to shrink, and its economy to contract in all but one year since the Great Recession. Because the Constitution of Puerto Rico established that "all available resources" must first go towards payment of the Commonwealth's general obligation bonds, in 2006, the Commonwealth began issuing Puerto Rico Sales Tax Revenue Bonds, which sought to avoid its constitution's limits by being paid directly into a separate urgent interest fund. Sales tax was increased to 11%. The last property tax assessment was done in 1958.

It was not until Puerto Rico enlarged its outstanding debt to US$71 billion—an amount approximately equal to 68% of Puerto Rico's gross domestic product (GDP)—that Puerto Rican bonds were downgraded to non-investment grade (better known as "junk status" or speculative grade) by three bond credit rating agencies between February 4 and 11, 2014. This downgrade triggered bond acceleration clauses that required Puerto Rico to repay certain debt instruments within months rather than years. Investors were concerned that Puerto Rico would eventually default on its debt. Such default would reduce Puerto Rico's ability to issue bonds in the future. Puerto Rico currently states that it is unable to maintain its current operations unless it takes drastic measures that may lead to civil unrest. There have already been protests over the austerity measures.  These events, along with a series of governmental financial deficits and a recession, have led to Puerto Rico's current debt crisis.


  • Cessation of Federal Subsidies
  • Mismanagement and Disparity
  • Economic Depression
  • Tax Policy
  • Disparity in Federal Social Funding
  • Triple Tax Exemption

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