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U.S. Department of the Treasury

Puerto Rico facing historic default on its $72 billion debt

Alan Gomez
USA TODAY
Puerto Rico Gov. Alejandro Garcia Padilla delivers his budget address for the next fiscal year at the Capitol building in San Juan on April 30, 2015.

MIAMI — Puerto Rico is just days away from a historic economic collapse after the commonwealth's governor said the island cannot pay its $72 billion in debts.

Gov. Alejandro García Padilla, who took office two years ago, told Puerto Ricans during a televised address Monday that his government's attempts to slash expenditures and restructure its debt have failed. He said an analysis by former World Bank and International Monetary Fund officials showed the "harsh reality" of the economic situation.

"Our public debt...is unpayable," he said. "The report states even if we increased taxes and cut back spending, the magnitude of the problem is such, because of the weight of the debt we carry, that it would solve nothing."

White House spokesman Josh Earnest said Monday that the Treasury Department has already been providing guidance to the island's government and that an interagency task force would help identify existing federal funds that it could benefit from. But he said the administration was not considering any kind of bailout for the island of 3.5 million people.

"There's no one in the administration or in D.C. that's contemplating a federal bailout of Puerto Rico," Earnest said. "But we do remain committed to working with Puerto Rico and their leaders as they address the serious financial challenges."

The inability of the U.S. territory to repay its debt, combined with the financial crisis in Greece, would have far-reaching implications for financial markets and unsuspecting American investors. Morningstar, an investment research firm based in Chicago, estimated in 2013 that 180 mutual funds in the United States and elsewhere have at least 5% of their portfolios in Puerto Rican bonds.

Puerto Rico, which became a territory of the United States in 1898 after a war with Spain, cannot legally file for bankruptcy, as American cities like Detroit have done when faced with similar fiscal crises. The island's constitution, however, states that Puerto Rico must make its debt payments before it pays for any other government services, leaving the island in a fiscal limbo if it cannot make its payments.

Since taking office, Padilla has worked with the island's development bank to restructure the debts owed by different government agencies. But that was a tall task for an island that began borrowing large sums of money in the 1970s to boost a lagging economy.

Municipal bonds are already exempt from state and local taxes, and Puerto Rican bonds enjoyed the added benefit of being exempt from federal taxes as well. That "triple-tax-free" status made the territory's bonds incredibly popular to investors. From 2000 to 2012, the government's public debt nearly tripled from $24 billion to $70 billion, according to the Center for a New Economy in Puerto Rico.

That left the island's governments inundated by debt payments. Combined with thousands of Puerto Ricans leaving the island for the U.S. mainland every year and a constantly sputtering economy, credit agencies lowered Puerto Rico's bond rating to near-junk status and warned of a full fiscal collapse.

Padilla responded by trying to cut everything, from basic government services to cell phone use by his employees. But it has proven not to be enough.

During his address Monday, Padilla said it was now up to Puerto Ricans, and the island's creditors, to assume "shared sacrifices" to get the island on firm legal ground.

"Yes, it is time that those who lent to us also come to the table of sacrifices, at which we are already seated, so that later we can all together share the fruits of that sacrifice," he said.

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