Puerto Rico is an unincorporated US territory in the Caribbean Sea whose citizens have US nationality.
Puerto Rico is deeply mired in debt and expects to be unable to meet its obligations to honour on $37 million worth of debt which is due to mature on the 1st of January 2016, just the first repayment due of an estimated $1 billion worth of debt interest payments due in the course of the coming year.
The commonwealth will repay $354 million worth of its obligations, but not be able to meet $35.9 million of Puerto Rico Infrastructure Financing Authority debt or $1.4 million of Public Finance Corporation bonds which are due. Equally, a debt of $400 million falls due in May and currently, there is no way to fund it.
The government of the island is trying to renegotiate $70 billion of debt with its investors, but are at an impasse. The ensuing financial crisis has led to school closures, unemployment at 12.5% - more than twice mainland US levels – and an exodus from the island. Estimates suggest that 45% of Puerto Ricans now live below the poverty line – more than 4 times the US mainland level. The island nation is prohibited by US law from declaring itself bankrupt (as Detroit did) which would enable it to restructure its debt.
The Governor of the Island, Alejandro Padilla noted that the nation would do “all [it] can to avoid the shutdown of vital government services”, adding: “These emergency measures are unsustainable. The consequences of a default without any legal framework to restructure our liabilities are so disastrous that for the past six months we have been executing emergency measures to continue meeting our obligations with our creditors and avoid a disruption of essential services to our citizens.”
Part of the genesis of the Island’s crisis is the fact that its bonds are highly sought after since bearers are exempted from paying taxes on them (local, state and federal, anywhere in the USA), making them an attractive investment and giving the administration a ready cash cow which has been abused for many years.
Debt repayments currently account for a third of Puerto Rico’s available revenues – by comparison, serving the US debt costs something like 6% of the Federal budget or 1.5% of GDP.