Puerto Rico’s in trouble. Its debt is around $74 billion and has officially filed for bankruptcy protection. 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. A decade 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 $74 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.
So what happens now?
Puerto Rico’s telling investors it really, really can't pay that Venmo request. So it's headed to a federal court where a judge will help the island restructure its debt. This is unprecedented because normally US states can't file for bankruptcy. But Puerto Rico can get away with it since it's not a state. Bad news for those investors because it's looking like the court will force them to take some pretty steep losses. And that might end up hitting American wallets. Any mutual fund with a stake in Puerto Rico’s debt is probably going to lose money.
What about the hurricane?
When Hurricane Maria hit Puerto Rico in September 2017, it devastated the island. Millions of people are still without power. Nearly half the island doesn't have running water. Most of the hospitals are out of commission. The rest are struggling with limited equipment. And there's a fuel shortage. That led President Trump to suspend the Jones Act.
What is the Jones Act?
A law that says foreign ships can't pick up and deliver goods between US ports. It's meant to protect the American shipping industry. It also made it harder to help deliver aid to Puerto Rico. The Trump administration lifted the Jones Act after Hurricanes Harvey and Irma to help Texas and Florida recover. Now, it's Puerto Rico's turn.
Puerto Rico is home to more than three million US citizens. And this is the worst natural disaster they've ever seen. And it comes as it's filing for the largest-ever bankruptcy protection for a US entity. Comforting.