Despite the severity of the debt circumstances in Puerto Rico, the financial crisis has gone largely unnoticed. The lack of attention on Puerto Rico is particularly shocking when comparing the crisis to the current state of Detroit. The island has a population of 3.7 million and debts of about $87 billion; this compares with a population of slightly over 700,000 in Detroit and debts of about $18 billion.1 As evidenced by this data, the sheer number of individuals and dollars involved are much larger in Puerto Rico. Even worse, unlike Detroit, Puerto Rico does not have the same option to seek relief in bankruptcy court. Territories, like states, have no ability to file for Chapter 9 municipal bankruptcy protection.2 With few options and a clearly unsustainable economic environment, the United States government and Puerto Rico are scrambling for solutions.
Puerto Rico’s Rapid Decline
The source of Puerto Rico’s financial troubles can be traced back to 2006, when a financial crisis forced San Juan to shut down.3 The government shutdown was disastrous for Puerto Rico, as the government is the largest employer on the island. All 1600 public schools and 43 government agencies were shut down and almost 100,000 people were out of work.4 A few years later, the Great Recession impact was felt worldwide, only exacerbating Puerto Rico’s vulnerable situation.
Coupled with the flailing economy is a rapidly declining employment rate. As of October 2013, the official unemployment rate in Puerto Rico is 14.7 percent.5 Of course, this number does not include those that have stopped looking for employment entirely, or fled to the United States in search of better opportunities.
Further contributing to the island’s problems is the rapidly declining population. Since 2009, the population has dropped nearly 10%.6 This means a shrinking tax base and further dips in demands and services, which the island’s debt cannot afford. Coupled with the quickly declining birthrate, there does not seem to be an end in sight.7
In early January 2014, three major credit ratings companies put Puerto Rico on watch for a possible downgrade. Most recently, on Tuesday, February 4th, Standard & Poor (S&P) downgraded Puerto Rico’s debt to junk status.8 Of course, this was met with anger from the Puerto Rican government who has made sincere efforts trying to cut back on debt despite the full awareness that their credit status was “on watch.” Eduardo Bhatia, president of Puerto Rico’s senate stated, “For the past year, we’ve met their demands and our people have made great sacrifices to improve the fiscal situation and honor all that debt they endorsed.”9. The government responded to this by assuring the Puerto Rican people that the government would be operating as usual and that legislation would be implemented to further reduce the deficit in 2014.
What’s Next for Puerto Rico?
With increasingly worsening financial status, Puerto Rico is left to consider its options, as its current economic status is unsustainable. As a state, Puerto Rico may not avail itself of the process of Chapter 9 bankruptcy. A pension fund of the Northern Mariana Islands tried to get around this issue by filing for protection under Chapter 11 of the bankruptcy code, which applies to corporations.10 The court declined this approach and refused the protection. With no other option, the president of the Puerto Rican Senate, Eduardo Bhatia, is hoping for a federal bailout. He said, “[The administration is] wondering how they can help Puerto Rico send a very strong signal of stability right now . . . We are waiting for some sort of an announcement from the Treasury and the White House.”11 Washington is adamant that a bailout won’t happen, primarily due to the belief that the bailout would be expensive and a default would be far more disruptive than Detroit’s bankruptcy filing.12
Recently, reports have surfaced that a group of hedge funds and private equity firms may be willing to help. Bankers at Morgan Stanley have been reaching out to about a dozen hedge funds, private equity firms, and other large investors to gauge their interest in providing up to $2 billion in financing to Puerto Rico.13 Those involved in the conversation reported that the debt could carry yields as high as 10 percent, more than double what a highly rated city or state pays to borrow money in the current municipal debt market. This incredibly high rate is evidence that Puerto Rico has exceeded the risk appetite of the traditional municipal bond market.
Regardless of whoever comes to Puerto Rican aid, the island’s junk credit rating certainly exacerbates the limited liquidity and access to capital markets.14 The new rating makes borrowing money much more expensive, forcing Puerto Rico to become more serious about taking steps to reduce the deficit and considering any bailout options.
Mary W. Wash, Worsening Debt Crisis Threatens Puerto Rico, N.Y. Times (Oct. 7, 2013, 8:48 PM), http://dealbook.nytimes.com/2013/10/07/worsening-debt-crisis-threatens-puerto-rico/. ↩
Richard Finger, Default: Puerto Rico’s Inevitable Option, Forbes (Dec. 1, 2013, 12:16 PM), http://www.forbes.com/sites/richardfinger/2013/12/01/default-puerto-ricos-inevitable-option/. ↩
Puerto Rico Closes Government Offices, Schools Amid Financial Crisis, USA Today (May 1, 2006, 8:23 PM), http://usatoday30.usatoday.com/news/nation/2006-05-01-puertorico_x.htm. ↩
Timothy A. Guzman, US Hegemony and Puerto Rico’s Economic Crisis, Global Research (Dec. 17, 2013), http://www.globalresearch.ca/us-hegemony-and-puerto-ricos-economic-crisis/5361819. ↩
Roberto A. Ferdman, The Scary Thing About Puerto Rico’s Population: It’s Leaving the Island for Good, Quartz (Jan. 7, 2014), http://qz.com/164317/the-scary-thing-about-puerto-ricos-population-its-leaving-the-island-for-good/. ↩
S&P Downgrades Puerto Rico Debt to Junk Status, Reuters (Feb 4, 2014, 5:26 PM), http://www.reuters.com/article/2014/02/04/us-munis-puertorico-idUSBREA131M720140204. ↩
Danica Coto, S&P Downgrades Debt to Junk Status, Seattle Pi (Feb 4, 2014, 3:43 PM), http://www.seattlepi.com/business/article/S-P-downgrades-Puerto-Rico-debt-to-junk-status-5204293.php. ↩
Rob Wile, Puerto Rico Might Need a Federal Bailout Because It Can’t Declare Bankruptcy, Bus. Insider (Oct. 9, 2013, 3:39 PM), http://www.businessinsider.com/puerto-rico-bailout-2013-10. ↩
Michael A. Fletcher, Puerto Rico, With at Least $70 billion in Debt, Confronts a Rising Economic Misery, Wash. Post (Nov. 30, 2013), http://www.washingtonpost.com/business/economy/puerto-rico-with-at-least-70-billion-in-debt-confronts-a-rising-economic-misery/2013/11/30/f40a22c6-5376-11e3-9fe0-fd2ca728e67c_story.html. ↩
Michael Corkery, $2 Billion Deal in Works for Puerto Rico, Dealbook N.Y. Times (Jan. 21, 2014, 8:15 PM), http://dealbook.nytimes.com/2014/01/21/2-billion-deal-in-works-for-puerto-rico/. ↩
Michael Aneiro, Puerto Rico Gets Junked, Barron’s (Feb. 8, 2014), http://online.barrons.com/article/SB50001424053111904710004579360920241056750.html. ↩