Puncturing years of malaise and questions over its financial health, Puerto Rico's governor has now said its debts are "not payable," and that the island's creditors will have to take a cut in what the government owes them.
In an interview with the New York Times on Sunday, Governor Alejandro Garcia Padilla called Puerto Rico's current financial straits a "death spiral," and said there was no feasible way for the island to continue to finance its debt.
Due to its status as a US territory, Puerto Rico is unable to declare bankruptcy, as American municipalities such as Detroit and Stockton, California, have in recent years. Any wide-scale restructuring of its roughly $72 billion in public debt will be complicated and unprecedented.
"There is no other option," Padilla told the Times. "I would love to have an easier option. This is not politics, this is math."
Since 2000, Puerto Rico's population has fallen from 3.8 million to fewer than 3.6 million — a drop of more than five percent — due almost entirely to emigration to the US. In the same time period, Puerto Rico's public debt nearly tripled to roughly 100 percent of its gross national product.
As its population and tax base dwindled — there are now more Puerto Ricans in the US than on the island — the government struggled to finance its debt, and levied increasingly austere economic policies on its remaining residents.
When VICE News visited Puerto Rico earlier this year, those measures were clearly felt among its most vulnerable, and the organizations that serve them, which have suffered drastic funding cuts. In conversations with dozens of Puerto Ricans, many said they were planning to leave, and all spoke with apprehension of their economic prospects.
The exodus of the past decade has cut across social strata, from laborers to the highly educated, worsening a sense of abandonment among those who stayed behind.
Padilla's announcement comes a day before his administration will reportedly release a commissioned report on the island's economy, coinciding with a televised speech from the governor on Monday evening. The report, written by three former officials at the International Monetary Fund, paints a dire picture.
"Structural problems, economic shocks, and weak public finances have yielded a decade of stagnation, outmigration and debt," wrote the report's authors, Anne Krueger, Ranjit Teja, and Andrew Wolfe. "Financial markets once looked past these realities but have since cut off the Commonwealth from normal market access. A crisis looms."
"There is no US precedent for anything of this scale or scope," said the report, which was obtained by VICE News.
For many years, investors and bond funds poured money into Puerto Rican debt issuances, which combined relatively higher yields with exemptions from many American taxes. That has since changed, as buyers have warily viewed a series of downgrades on its debt from the main international rating agencies.
"The commonwealth," said the report, "is now virtually shut off from normal market access." Seeking to restore confidence, Padilla fired government workers, raised taxes, and cut pensions. Those efforts failed to stem a rise in debt, and further alienated Puerto Ricans, who for years have watched their leaders enmeshed in their own corruption scandals.
Watch the VICE News documentary, Guns in Puerto Rico: Locked and Loaded in the Tropics.
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The so-called "Krueger" report recommended farther reaching steps than austerity, including the restructuring of bonds, which Padilla also endorses.
"A combination of structural reforms, fiscal adjustment, and debt restructuring ensures that all problems are addressed," said the report. "And, importantly, it shares the costs and benefits of adjustment of all stakeholders."
The document also recommended seeking an exemption from the federal minimum wage of $7.25 per hour, which it said was too high "relative to local incomes and regional competitors." It also urged exemption from the century-old US Jones Act, a law that prevents international cargo ships from docking directly in Puerto Rico, thereby raising the price of goods on the island.
Much of Padilla's efforts to crawl out from Puerto Rico's debt load has centered on some $25 billion in debt that was issued by public corporations, such as its electricity authority. Puerto Rico has advocated for US Congress to allow those corporations to declare bankruptcy, with little luck.
On July 1, Puerto Rico is faced with a $655 million payment on its general obligation debt which, under the island's constitution, must be paid before even its civil employees.
Should bondholders balk at restructuring their debt, the resulting impasse could lead to chaos in bond markets as investors authorities dance around a possible default.
"My administration is doing everything not to default," Garcia told the Times. "But we have to make the economy grow."
Follow Samuel Oakford on Twitter: @samueloakford