theSkimm's Guide to

PUERTO RICO DEBT CRISIS

THE STORY

Puerto Rico’s in trouble. The island’s got $72 billion in debt that its governor says is “not payable.” So that’s….great.

COUGH, I KNOW PUERTO RICO’S NOT A US STATE, COUGH

Nope, not a state. It’s a commonwealth that the US said ‘mine’ to in the late 1800s. Which means Puerto Rico is like a college kid -- kinda independent, kinda not. Puerto Ricans don’t pay certain federal taxes, and they can’t vote in US presidential elections. But they are US citizens, they use the US dollar, and they can join the US army.

SO HOW DID ITS PROBLEMS START?

The US gov. used to give major tax breaks to corporations operating in Puerto Rico, which drove a LOT of business to the island. But in 2006, Congress let those tax breaks expire. Cue businesses using the pullout method. And then Puerto Rico’s economy went into a recession. People started leaving the island, which meant fewer people were paying taxes. Lower tax revenue meant Puerto Rico had to cut back on public services, and hike tax rates. Which caused even more people to leave the island. Nine years later, Puerto Rico is still in a recession.

WHERE DID ALL THE DEBT COME FROM?

Puerto Rico has been able to borrow money without a lot of raised eyebrows thanks to -- once again -- a US tax break. Unlike US states, Congress lets Puerto Rico issue debt that’s tax free. This made the island’s debt really attractive to investors, who lent their money for way longer than they might have otherwise.

IS PUERTO RICO THE NEW GREECE?

Not quite. Greece’s debt is mostly held by public lenders (think: eurozone, IMF). Puerto Rico’s debt is mostly in the hands of private investors (think: hedge funds, mutual funds, individuals), who are now caught holding the $72 billion bag. And unlike Greece, whose economic issues put the whole eurozone at risk, the US economy doesn’t have a huge overall stake in Puerto Rico’s problems.

THIS IS BAD. BUT WHY DO I CARE?

Because this is hitting American wallets. Any mutual fund with a stake in Puerto Rico’s debt is probably going to lose money. Meanwhile, presidential candidates care about Puerto Rico because the Latino community cares about Puerto Rico. Get ready to hear about this a lot in 2016.

SO WHAT HAPPENS NOW?

Puerto Rico’s gov. says the island is broke and can’t pay off its debts. He says Puerto Rico is going to have to work out a new payment plan with creditors, who probably won’t see their money again for “a number of years.” Comforting. He also says if they all can’t agree, the next option is “unplanned and unilateral default.” Even more comforting.

IS CONGRESS INVOLVED IN ANY OF THIS?

Yup. Unfortunately for Puerto Rico, none of its cities or public companies have access to US bankruptcy protections. And Congress has the power to change that. As usual, there are opinions: Dems think Puerto Rico’s public companies should get the OK to declare bankruptcy. The GOP says that wouldn’t do enough to solve the island’s underlying spending issues.

theSKIMM

Puerto Rico is one, huge, hot mess that could hit Americans’ pocketbooks and shake up the 2016 race. And the island’s relying on Congress in big part to pull it out of that mess. Which is never a sign of good things to come.