Puerto Rico’s filling for bankruptcy on Wednesday comes as the largest municipal bankruptcy in U.S history. Their $73 billion bond debt far exceeds Detroit’s, whose dept was approximately $10 billion in 2013. The filling is arguably long overdue, as Puerto Rico’s economy has been struggling for the past decade, the island of 3 million managed to accumulate dept that far exceeds their capability of paying back creditors.
Puerto Rico has been dealing with a struggling economy for about ten years. Among their 3 million inhabitants, 12% are unemployed. That is double the national average. A lack of investment due to increasing costs has led to huge government cutbacks. Things like schools, hospitals, and social-service programs have taken the biggest hit from these cutbacks. The only thing that kept the Puerto Rican economy above water was the U.S federal tax credit they received. This was given to incentivize the island to move out of an agricultural based economy to a more manufactured driven economy. Since the tax credit was halted in 2006, Puerto Rico has had serious difficulties creating jobs. Consequently, Puerto Rico’s failing economy prevented them from paying back long overdue debts to investors and Hedge-Fund creditors
Creditors of Puerto Rico have recently filed lawsuits in the hopes of getting back their investment. In 2014, Puerto Rico municipal bonds were selling at an all time low, this naturally enticed many creditors to buy them with the expectation that the Puerto Rican economy would turn itself around. According to the Wall Street Journal “for years, investors over-looked these fiscal and demographic problems because Puerto Rico’s bonds offered high yields and because they believed the island’s economy would eventually recover.” This comes as a huge loss and disappointment to creditors who had high hopes of getting back their investments when Gov. Ricardo Rossello had been elected. Gov. Rossello in his campaign pledged to repay the territory’s debt to Wall Street, but with the filing on Wednesday, it seems Rossello will not be able to fulfill his campaign promise (not like he’s the first).
Puerto Rico’s Title III Filing, (which they are calling it because they technically cannot legally call it a Chapter 9) resulted in an announcement from the oversight board stating that they would not consider paying creditors more than $800 million, way below the amount of debt they owe. Another option is austerity, but because Puerto Rico is a state of the U.S, citizens can just leave to avoid paying back dept. Therefore, it seems creditors may just have to live with their poor investment choices and take a loss. Puerto Rico on the other hand may be okay if the government decides to relinquish them of their debt. President Trump has voiced his disapproval of this approach along with many Republican Congressman. They argue that the federal government has been giving Puerto Rico subsidies for years and should no longer continue to do so. However, Puerto Rico says that if the government decides to cancel their debt, they may finally be given the fresh start they so direly need.