What You Should Know About Puerto Rico's Debt Crisis
Puerto Rico's debt crisis is rapidly becoming a disaster with real-world consequences, and unless Congress acts soon, it could get even worse.
Puerto Rico has a problem maybe you're familiar with: The government owes more money than it can afford to pay. The island is about $70 billion in the hole, and things have gotten to the point where it is beginning to refuse to pay its creditors.
On Monday, those creditors went away mostly empty handed, as Puerto Rico defaulted on a whopping $400 million debt payment. This move—paying $22 million of general-obligation debt it owed, while letting the other $400 million default—was not at all unexpected. It had been telegraphed for the last 18 months or more, and PR's intention to not pay up became crystal clear during Sunday's televised address from Governor Alejandro Garcia Padilla, who called the current financial woes "a humanitarian crisis."
He's not wrong. In the recession (due largely to US tax policy that led to companies first flocking to the island, then abandoning it) that's hovered over the island for close to a decade, housing prices have taken a nose dive and nearly half a million people have left Puerto Rico, as CNN has reported. That has shrunk the island's tax base, and PR now finds itself locked in "a death spiral," as Padilla calls it. Basic services have begun suffering—trash is being picked up infrequently, hospitals are closing, tax returns are being delayed, and there isn't enough money to pay for gas in police cars. What's more, given its diminishing resources, there are new fears that a new outbreak of Zika on the island will be hard to control.
But shit won't really hit the fan until July 1, when Puerto Rico's next debt payment is due, and the US territory's government will almost certainly default on another $2 billion.
So how did Puerto Rico get here? The answer is long and complicated, but at least some of the blame can be laid on the US, say experts.
"Puerto Rico has been a political pawn historically since its inception," says Craig Centrie, a University at Buffalo lecturer of Latino Studies. "Most significantly during the Cold War, PR was used as a tool of propaganda between the US and Soviet Union to demonstrate the overall superiority of capitalism over communism."
To achieve this, says Centrie, people and corporations were enticed to the island by considerable tax cuts and other financial incentives, but these investments did not necessarily benefit the island. When those tax incentives and cuts were eliminated for good in 2006, there was no way to replace the income. "Puerto Rico has been forcibly moved from small self-sustaining agriculture to a large scale mono-machine crop economy pushing the rural population to San Juan without employment," says Centrie. "The flow of tax monies more recently supported the overall infrastructure, but with these funds eliminated the economy has been ruined."
For a while, most Americans pretty much ignored PR's problems, but in the past few months, the situation has gotten so dire the mainland media has begun to pay attention, up to and including John Oliver:
Many high-ranking politicians and officials—both Democratic and Republican—have urged that something be done.
"The human costs for the 3.5 million Americans in Puerto Rico are real. And they are escalating daily," Treasury Secretary Jacob J. Lew wrote in a letter to Congress Monday, urging them to act and avoid a bailout by taxpayers.
"Congress has a constitutional and financial responsibility to bring order to the chaos that is unfolding in the US territory," House Speaker Paul Ryan said last month. The way to bring order, many think, would be to allow PR to declare bankruptcy, or at least give the government a way to restructure its debt. If nothing is done, Lew warns, Puerto Rico will descend into "cascading defaults" of ever-bigger payments, worsening the crisis.
Though some Republican leaders like Ryan have supported a bill that would attempt to tackle the debt crisis, Democrats say that the right-wing party is dragging its heels; New Jersey Democratic Senator Bob Menendez said that Republicans were "content to watch the island burn."
US House Natural Resources chairman Rob Bishop, a Republican, has been charged with forging a plan for the debt crisis, but said he won't release a new version of his bill until the House is back in session next week. After that, it will be Ryan's job to convince House Republicans to act before Puerto Rico's big $2 billion payment becomes due on July 1. If they don't, the problems will really start.