Puerto Rico in Default

This week Puerto Rico’s Government Development Bank announced that it would make a partial payment on its upcoming Public Finance Corporation (PFC) debt.  Moody’s stated that such action would be deemed a default by the island commonwealth. “This event is consistent with our belief that Puerto Rico does not have the resources to make all of its forthcoming debt payments. This is a first in what we believe will be broad defaults on commonwealth debt,” stated Emily Raimes, vice president at Moody’s Investors Service.

The default has prompted the biggest municipal default in US History, which will no doubt bring about lengthy and contentious litigation with creditors, as well as guaranteed austerity making life all the more difficult for working families who choose to remain on the island.  To put the debt payments in perspective this week’s deadline required a $58 million payment, however, the government was only able to transfer $628,000 to the PFC. The island is encumbered to the tune of $72 billion in total debt, which is equal to the Puerto Rican gross national product.

The US island territory simply has not been able to grow at a rate fast enough to sustain its debt obligation. Years of sluggish wages, brain drain, and high unemployment have been emblematic of this inevitable outcome.

Now the question is what comes next?  A Detroit-style bankruptcy under Chapter Nine is unavailable due to the Puerto Rican Constitution’s prohibition of declaring bankruptcy. Since Puerto Rico is a United States territory and not a sovereign nation it cannot seek relief from the International Monetary Fund. That means Congressional intervention is needed to facilitate the how Puerto Rico will be able to negotiate a settlement with the commonwealth’s creditors. Two possible options for Congress is granting the commonwealth statehood, or authorizing Puerto Rico the power to pursue Chapter 9 bankruptcy.

As it stands now, Puerto Rico seems to be headed in a similar direction as Greece, facing heavy austerity measures that threaten to cripple the island’s education system and other social programs.  In the months to come it will be intriguing to see how Congress will make Puerto Rico’s recovery a priority despite a forthcoming election year and the typical legislative dysfunction.