5 Things Every American Should Know About Puerto Rico's Financial Crisis

5 Things Every American Should Know About Puerto Rico's Financial Crisis

Puerto Rico Gov. Alejandro García Padilla finally admitted defeat on Sunday, telling The New York Times that the island could not pay its massive $72 billion debt. Instead of taking on another round of high-interest borrowing to delay the inevitable default, he said it's time for Puerto Rico's creditors to "share the sacrifices" that the island's residents have already had to bear.

In light of that major development, here are five key reasons why every American should care about what's going on in Puerto Rico. An earlier version of this article was published in May.

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You might not guess from the amount of media attention the island receives on the mainland -- or from how often the mainland media incorrectly refers to Puerto Ricans living in the states as "immigrants" -- but everyone born on the island is an American citizen and holds a U.S. passport. However, the 3.7 million Puerto Ricans currently living on the island aren't eligible to vote for president -- just those who have moved to one of the 50 U.S. states.

Like many of their fellow Americans, Puerto Ricans have been vocal in their opposition to balancing budgets on the backs of the poor and middle classes. Earlier this year, throngs of students hit the streets of San Juan to protest García Padilla's proposal to cut some $166 million from the island's public university system -- roughly one-fifth of the system's total budget. The drop in education funding was among the most controversial in a series of deep cuts to Puerto Rico's budget and emblematic of the extreme austerity measures pushed to handle the spiraling debt crisis.

obama puerto rico

Legislation to help Puerto Rico get out from under its debt burden has been proposed in Congress by Resident Commissioner Pedro Pierluisi, the island's non-voting representative. The Puerto Rico Chapter 9 Uniformity Act would allow the island's municipalities and public corporations to declare bankruptcy and restructure their debts under Chapter 9 -- something that the cities and towns of all 50 states already can do. But many members of Congress oppose the move as a bailout, even though it would not cost the federal government.

Absent an act of Congress, the Federal Reserve is prohibited from lending Puerto Rico money. U.S. Treasury officials and the White House have publicly ruled out aid packages to save the island's government from default, instead advising Puerto Rican officials to just keep searching for "credible" financing plans.

On Monday, the White House reiterated its anti-bailout position, although it did urge Congress to explore extending financial relief to the island by extending Chapter 9.

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Some of the biggest stakeholders in Puerto Rico's financial crisis can be found on the U.S. mainland.

The island's municipal bonds have been widely traded in U.S. markets due to their triple tax-exempt status -- exempt from federal, state and local taxes, they've been an attractive bet for long-term investors. Despite the growing economic instability and the rumblings of a potential default, investment banks and hedge funds have continued to view Puerto Rico that way.

Last year, the island sold some $3.5 billion in municipal bonds even though they were given junk status -- the largest junk-rated municipal offering in history, according to Bloomberg. And earlier this year, Goldman Sachs' asset management division boosted its stake in Puerto Rico's government-run power company, PREPA, from $351 million to $1.3 billion.

jeb bush puerto rico

Visiting Puerto Rico is widely viewed as a way to shore up support among the mainland's increasingly powerful Latino vote. While island residents can't vote for president, nearly 5 million Puerto Rican-born and -descended people live in one of the 50 states, and they enjoy the right to vote. An increasing number of Puerto Ricans are concentrated in the swing state of Florida.

So it's no surprise that former Florida Gov. Jeb Bush (R) visited the island earlier this year on a fundraising trip, during which he openly endorsed giving Puerto Rico access to bankruptcy protections. While in South Carolina on Monday, Bush again spoke favorably about allowing Puerto Rican municipalities and public corporations to declare bankruptcy, though he also raised conditions.

"I think if Puerto Rico can make a compelling case that they’re prepared to alter the social contract with their extraordinarily large number of state workers and in return for allowing for a reduction, you know, dealing with the debt load that’s unsustainable, where they can start growing economically again -- they’d have to do all three of those things at once -- then giving them that flexibility would be important," Bush told reporters. "That’s why I’ve suggested it about a month ago. I think Puerto Rico has a responsibility now to come up with a plan that makes it serious, a serious plan that people could look at."

Democratic presidential hopeful Hillary Clinton also has plans to visit the island this year, according to Puerto Rican daily El Nuevo Día.

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While Puerto Rico's economic situation is more serious than that of the 50 U.S. states, its problems should sound familiar: contraction of the manufacturing sector, weaker job security, difficulty in reversing unemployment, loss of public services and middle class decline.

And if certain mainland politicians have their way, Puerto Rico's plight might grow even more familiar. In the past, conservatives on the national stage have touted the island's push toward austerity as a model for making small government work.

CORRECTION: An earlier version of this story misstated the status of Puerto Rico's municipal bonds. They are triple tax-exempt in the U.S. -- that is, exempt from federal, state and local taxes.

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