#us commonwealth

What Everyone Needs to Know Q&A: In recent months, Puerto Rico’s colossal public debt has sparked an economic crisis that has catapulted it onto the national stage. As the Island’s attempts to slash its massive debts take on even greater urgency after Hurricane Maria, we want to know:

What factors led to the Island’s public debt crisis?

Puerto Rico’s sustained economic deterioration since 2006 has been associated with a spiraling cycle of public debt. The Commonwealth accumulated fiscal deficits as it continued to borrow money by issuing municipal bonds, to pay public employees and maintain public services. Instead of restructuring its economy after the demise of Section 936, the insular government more than doubled its debt from $17.6 billion in 1996 to almost $40 billion in 2006. The debt nearly doubled again to over $72 billion in 2015. Much of the Island’s debt stems from public corporations such as the electrical power authority, the government development bank, the transportation authority, and the water and sewage authority. The Commonwealth government has taken austerity measures to reduce public spending and increase state revenues—such as laying off thirty thousand public employees in 2009 and cutting back state contributions to public pension systems. But such measures have been insufficient to straighten the Island’s finances. In 2014, the three main credit rating agencies (Fitch, Moody’s, and Standard and Poor) downgraded the Commonwealth’s bonds to junk status.

On 28 June 2015, Governor Alejandro García Padilla (b. 1971) declared that “the debt is not payable.” Because Puerto Rico is not a state of the American union, it does not qualify for federal bankruptcy; because it is not a sovereign country, it cannot apply for emergency financial assistance from multilateral organizations such as the International Monetary Fund. In May 2016, the Commonwealth government declared a fiscal state of emergency and a moratorium on its public debt obligations. In July 2016, the Commonwealth government defaulted on nearly one billion dollars in debt payments.

[Page 101-102, Puerto Rico: What Everyone Needs to Know by Jorge Duany]