Home
/
RELIGION & LIBERTY ONLINE
/
Explainer: Puerto Rico’s Financial Crisis
Explainer: Puerto Rico’s Financial Crisis
Oct 4, 2024 1:25 PM

The monwealth of Puerto Rico is struggling under a massive $72 billion debt and a decade-long economic recession. Here is what you should know about the ongoing financial crisis:

How did the debt crisis happen?

During the Spanish-American War in the late 1890s the U.S. military invaded the Spanish-owned island of Puerto Rico. After the war ended, the U.S. retained control, making the islands an unincorporated territory and the residents U.S. citizens.

In 1917, Congress passed the Puerto Rican Federal Relations Act of 1917 which, among other features, gave the territory “triple tax exemption” (i.e., local, state, and federal) on most Puerto Rican bonds. Because the bonds were exempt regardless of where the bond holder resides, this exemption made Puerto Rican bonds attractive to investors both on the island and the mainland of the U.S. The local and territorial governments of Puerto Rico were able to sell bonds as a way to balance the territory’s budget and fund municipal services.

Additionally, the island benefited from tax breaks for corporations that moved to the island. From the 1970s to the 1990s, numerous industries — from clothing to pharmaceuticals — moved operations to Puerto Rico. But Congress allowed those tax incentives to expire in 1996, which lead to an exodus panies (and people) back to the mainland. This bined with an economic depression that has lasted 11 years, reduced Puerto Rico’s tax base, leading government officials to issue even more debt to cover the shortfall.

In 2014, the debt-to-GDP ratio reached 68 percent, which drove concerns the island would default on the bonds it had issued. In February 2014, three American credit rating agencies downgraded the government’s debt to non-investment grade (i.e., “junk”) which made borrowing by the government even more difficult.

About half of Puerto Rico’s budget was going to service the debt, so the territory passed a law suspending through January 2017 payments to investors holding general-obligation bonds, sales-tax securities and debt from the island’s Government Development Bank, and other public agencies.

If this has been going on for years, why it is now in the news?

Early this month Puerto Rico defaulted on a principal payment of $399 million —the island’s largest default to date. That action prompted Congress to expedite a plan to oversee the problem. House Speaker Paul Ryan has said he’ll make the Puerto Rico rescue package a priority, though the lead has been taken up in the Senate by Democrats.

If Congress doesn’t act quickly enough the Supreme Court may intervene. According to Reuters, the Court is scheduled to “rule by the end of June on the validity of a Puerto Rico law that would allow the U.S. territory to restructure the chunk of its debt issued by public agencies, more than $20 billion, in a bankruptcy-like process.”

Can’t the municipalities in Puerto Rico that issued the bonds just declare bankruptcy?

No, at least not yet. Unlike municipalities in states (think: Detroit), cities in Puerto Rico are not allowed to declare bankruptcy. But Democrats in Congress have proposed legislation to “to treat Puerto Rico as a State for purposes of chapter 9 of such title relating to the adjustment of debts of municipalities.” However, Republicans in Congress say that they want to see the undisclosed economic data from the island and to address the problem’s root causes.

Is Puerto Rico’s problem similar to the crisis in Greece?

Yes and no. Some of the underlying problems (e.g., a weak tax base) are similar, but a major difference is that most of Greece’s debt is held by foreign countries while Puerto Rico’s debt is owned by individual investors, pension funds, etc. That makes it more difficult for the default to be absorbed.

Additionally, if Congress allows a default by a U.S. territory it could have an effect on state and municipal bonds, causing bondholders to seek higher yields to offset the risk. This would mean that state and city taxpayers would have to pay more to finance local projects.

Other than citizens of Puerto Rico, who will be most affected by a defaults on the bonds?

American investors, particular older people and retirees. The bonds were considered a safe investment so they are held by a large number of mutual funds. Over 20 percent (377 out of 1,884) of bond mutual funds own Puerto Rican bonds, according to data from Morningstar.

Because older people and retirees tend to hold more of their money in bonds, a default could affect their savings or retirement e.

Comments
Welcome to mreligion comments! Please keep conversations courteous and on-topic. To fosterproductive and respectful conversations, you may see comments from our Community Managers.
Sign up to post
Sort by
Show More Comments
RELIGION & LIBERTY ONLINE
‘Economic Growth: Unleashing the Potential of Human Flourishing’: Values & Capitalism Publication
Values & Capitalism, a project of the American Enterprise Institute, has published a primer of sorts entitled, Economic Growth: Unleashing the Potential of Human Flourishing. The text is just over 100 pages, and gives the reader a thoughtful, concise and essential source on free market economics and its correlation to human flourishing and economic growth. Authors Edd S. Noell, Stephen L. S. Smith and Bruce G. Webb say this about their work: [T]he core proposition of this book is that...
Evangelical and Catholic Leaders Claim IRS Harrassment
After the recent admission by the IRS that employees targeted conservative groups, two prominent Christians e forward claiming they too were harassed for their political views. Franklin Graham, son of the famed evangelist, and Dr. Anne Hendershott, a Catholic professor and author, say they were audited by the IRS after making political statements that criticized liberal political groups. Franklin Graham recently sent a letter to President Obama saying that he believes his organization was also unfairly targeted for extra scrutiny...
What’s a Few Dead Eagles Between Friends?
There are currently two sets of laws in America: laws that apply to everyone and laws that apply to everyone except for friends of the Obama administration. In January I wrote about how the executive branch had argued that the Migratory Bird Treaty Act of 1918 should be broadly interpreted in order to impose criminal liability for actions that indirectly result in a protected bird’s death. The administration used that reasoning to file criminal charges against three panies. The U.S....
Money is a Means
Over at Think Christian today, I lend some broader perspective concerning the link between money and happiness occasioned by a piece on The Atlantic on some research that challenged some of the accepted scholarly wisdom on the subject. The Bible is our best resource for getting the connection between material and spiritual goods right. I conclude in the TC piece, “As Jesus put it, ‘life does not consist in an abundance of possessions.'” Or to put it another way, we...
The Bangladesh Factory Collapse and the Messiness of Economic Development
The horrific factory collapse in Bangladesh, now surpassing 1,100 in total deaths, has caused many to ponder how we might prevent such tragedies in the future, leading to plenty of ideological introspection about economic development and free trade. Describing the situation as “neither too simple nor plex,” Brian Dijkema encourages a healthy mix of confidence and caution. With folks calling for plete take-down of global capitalism on one end and elevating stiff pro-market arguments on the other, Dijkema reminds us...
Kuyper on Creation and Stewardship
In Abraham Kuyper’s recently translated sermon, “Rooted & Grounded,” he explains that the church is both “organism” and “institution,” drawing from both nature and the work of human hands. Pointing to Ephesians 3:17, he writes that, “the church of the Lord is one loaf, dough that rise according to its nature but nevertheless kneaded with human hands, and baked like bread.” Yet, as he goes on to note, this two-fold requirement is not limited to the church, but also applies...
Acton University Evening Speaker Marina Nemat: ‘Prisoner Of Tehran’
Those who’ve attended Acton University in the past know that the Evening Speakers are memorable, uplifting and often the highlight of the day for many. This year, one speaker is Marina Nemat, currently teaching at the University of Toronto. Nemat is set to speak on her book, Prisoner of Tehran. The memoir details her imprisonment, with a life sentence, at age 16 in the notorious Evin Prison in Tehran during the Khomeini Regime. While the memoir, by its nature, is...
Free primary education is a fundamental good. Isn’t it?
Private schools are for the privileged and those willing to pay high costs for education; everyone else attends public school or seeks alternate options: this is the accepted wisdom. In the United States, the vast majority of students at the primary and secondary level attend public school, funded by the government. When considering education in the developing world, we may hold fast to this thinking, believing that for those in severely impoverished areas, private education is an unrealistic and scarce...
One Man’s Great Escape from North Korea
“I escaped physically, I haven’t escaped psychologically,” says Shin Dong-hyuk. His remarkable journey out of a deadly North Korean prison to freedom is chronicled in Escape from Camp 14 by Blaine Harden. Shin didn’t escape for freedom. He had little knowledge of such a concept. He had heard that outside the prison, and especially outside North Korea, meat was available to eat. Shin was born at Camp 14 in 1982 and was strictly forbidden to leave because of the sins...
Acton University Evening Speaker: William B. Allen
We are about a month away from Acton University, and another keynote speaker is William B. Allen. He is an expert in the American founding and U.S. Constitution; the American founders; the influence of various political philosophers on the American founding. He is Emeritus Professor of Political Philosophy in the Department of Political Science and Emeritus Dean, James Madison College, at Michigan State University. Currently he serves as Visiting Senior Professor in the Matthew J. Ryan Center for the Study...
Related Classification
Copyright 2023-2024 - www.mreligion.com All Rights Reserved