NEW YORK—Puerto Rico is in uncharted territory after a historic default. A federal oversight board is getting ready to oversee the island’s finances amid a dire economic crisis.
The government of Puerto Rico said Friday it only paid about half the roughly $2 billion it was due to repay, saying it didn’t have the money to pay $779 million in bonds that are supposed to have top priority. Overall Puerto Rico has about $70 billion in public debt.
How did Puerto Rico get into this mess?
Puerto Rico’s economy has been in recession for roughly 10 years. Manufacturing jobs started leaving the territory after certain tax credits expired, and the global economic downturn that started in 2007 compounded the impact. The territory’s unemployment rate is around 12 percent, more than double the U.S. rate of 5 percent. Residents have been leaving the territory in search of new opportunities.
Puerto Rico’s government borrowed heavily to cover budget shortfalls. Its debt burden has become so large that the government is unable to both service its debts and provide basic government services. Roughly a third of Puerto Rican tax revenue now goes to cover its debt.
Why would investors lend so much money?
Puerto Rico’s bonds are exempt from federal or state income tax to residents of all 50 states. That made its bonds attractive to investors across the U.S.
Why can’t Puerto Rico go into bankruptcy like Detroit?
Since Puerto Rico isn’t a state, it’s unable to access what’s known as Chapter 9 of the U.S. Bankruptcy Code. This week President Obama approved a rescue package that temporarily protects the territory from lawsuits from creditors who want to recover their investments.
Why does this default matter more than previous ones?
Because Puerto Rico is defaulting on bonds that were sold to investors as especially safe.
