Puerto Rico Is on the Brink of Default

BY DAVID FRANCIS-APRIL 29, 2016

Barring an unlikely last-minute miracle, Puerto Rico is going to default on its debt Monday.

The U.S. commonwealth owes creditors $70 billion, and $422 million of that is due on May 1. This week, Puerto Rico Gov. Alejandro Garcia Padilla said “there will be a default on Monday,” adding, “I don’t think there is a deal on the table that avoids a default.”

Earlier this year, House Speaker Paul Ryan (R-Wis.) gave lawmakers three months to come up with a “responsible solution” to the island’s debt crisis, but so far Democrats and Republicans can’t come to terms on how to rescue Puerto Rico, home to 3.5 million U.S. citizens. The White House wants Congress to give Padilla’s government something similar to Chapter 9 bankruptcy protection, which would set up an orderly process for creditors to get paid back some of what they’re owed.

So far, lawmakers have failed to agree on legislation that would grant Puerto Rico this protection. Opponents of a bailout insist that the island must be more transparent about the state of its finances before a bailout occurs.

“I don’t think it’s fair to say it’s going to be a bailout upfront. I think that’s accurate, but the major concern is will it end up being a backstop?,” Rep. Dave Brat (R-Va.), a member of the conservative House Freedom Caucus, saidearlier this week of the proposed Puerto Rico Oversight, Management and Economic Stability Act (PROMESA). “If we go along with setting up a control board and something goes wrong … who’s the backstop?”

Even HBO’s John Oliver has weighed in on the crisis, urging Congress to give Puerto Rico a lifeline.

A restructuring of Puerto Rico’s $70 billion in debt would be the biggest ever in the $3.7 trillion-dollar municipal market. State and local governments rely on these loans to raise cash to pay for the cost of operating.

Without congressional action, Puerto Rico’s default gets ugly quickly. When and if the island misses its payment Monday, it opens the door to larger and more consequential defaults on debt protected by the island’s constitution. Puerto Rico owes $2 billion on July 1. This includes an $805 million payment on its general-obligation bonds, guaranteed under the island’s constitution to be paid before anything else.

In March, Padilla said that without financial help, his government would not be able to deal with the Zika virus, because it did not have the cash to eliminate standing pools of water or other places where mosquitoes thrive. Bites from the bug transmit the virus, which has been linked to birth defects, and the CDC estimates 20 percent of Puerto Ricans living on the island could contract it. On Friday, the Centers for Disease Control and Prevention reported the first death from the virus on the island. 

And economic conditions there show no sign of improving, so chances that the government could eventually come up with the money it owes are slim. Puerto Rico faces a trifecta of challenges: Its government has spent irresponsibly for years; for five of the last six, it has failed to pass a balanced budget, a constitutional requirement. Its GDP hasn’t grown since 2005, floating in negative territory ever since.

And its population is shrinking, fast. According to a Pew report released in March, its population is 3.47 million in 2015, down 334,000 from 2000, or a 9 percent drop. Seventy-five percent of this loss has occurred since 2010. This continues the largest emigration in more than 50 years, Pew found.

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