Puerto Rico is a Caribbean island and unincorporated U.S. territory governed by the U.S. Congress with full jurisdiction under the Puerto Rico Federal Relations Act of 1950. Despite the fact that Puerto Ricans are natural-born citizens of the United States, the islanders do not have the constitutional right to vote for the president and vice president or for members of Congress.
The Puerto Rican debt crisis has been an ongoing financial situation and reaching the point where the island now owes more than $70 billion USD with a debt-to-GDP ratio of about 68%.It’s credit ratings were downgraded in February 2014 to non-investment grade.
Analysts are saying the default could become the biggest crisis ever in the $3.7 trillion market that U.S. state and local entities use to access financing.
The island’s spiraling debt took a turn for the worse over the weekend after Governor Alejandro Garcia Padilla announced the island is unable to pay its creditors Sunday, halting a scheduled $422m (£289m) bond payment to the island's Government Development Bank (GDB)due on Monday after talks to ease the US territory's crisis ended without a deal. Analysts are saying the default could become the biggest crisis ever in the $3.7 trillion market that U.S. state and local entities use to access financing.
The governor took to the media to make the announcement Sunday that he had issued an executive order suspending payments. Describing the move as a "painful decision", Garcia admitted that he had been warning since last year that the island's public debt of more than $70bn was unpayable. He acknowledged before the weekend that if the payment was not made, it was likely to spark legal action from creditors. Another debt payment of $1.9 million is due in July.
Puerto Rico is being pressured by creditors and their consultants that the island undertake drastic spending cuts in order to create surpluses large enough to meet debt obligations but the Padilla government has stood firm against these suggestions. According to Padilla, “We would have preferred to have had a legal framework to restructure our debts in an orderly manner. But faced with the inability to meet the demands of our creditors and the needs of our people, I had to make a choice. I decided that essential services for the 3.5 million American citizens in Puerto Rico came first.”
Puerto Rico is not considered a state and is unable to access what's known as Chapter 9 of the U.S. Bankruptcy Code. The US Congress has tried in the past to find a solution to the island’s accumulating debt but without success and Padilla has now asked Congress to create a legal framework that would allow Puerto Rico to restructure its debts. Congress, in the meantime, is in recess until next Monday.
Some creditors, albeit frustrated with Garcia Padilla's administration which has not issued audited financial statements since fiscal year 2013, admit that government reforms could allow the island to pay its debts without hurting its people and that the current default could put additional pressure on the U.S. Congress to find a legislative solution for Puerto Rico.
Not all congressional members are in favor of a bailout, however. U.S. House Speaker Paul Ryan had called for a plan by March 31 but opposition from liberal and conservative wings of both parties nixed draft legislation from the House Natural Resources Committee, which would have put Puerto Rico's finances under federal oversight and allowed it to restructure its debt through a bankruptcy-like process.
Now, more extreme measures are called for. GDB is already operating under emergency conditions and has reached a tentative framework agreement with investors who hold $900 million of its debt under which creditors would agree to a potential discount of 53 cents on each dollar of the face value of their original securities. The parties are now negotiating.