Home
/
RELIGION & LIBERTY ONLINE
/
Explainer: Puerto Rico’s Financial Crisis
Explainer: Puerto Rico’s Financial Crisis
Jul 14, 2025 4:40 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
Verse of the Day
  Commentary on Today's Verse   Commentary on James 3:1-12   (Read James 3:1-12)   We are taught to dread an unruly tongue, as one of the greatest evils. The affairs of mankind are thrown into confusion by the tongues of men. Every age of the world, and every condition of life, private or public, affords examples of this. Hell has more to do...
The Intersection of Christianity and Libertarianism
A brief summary of the article discussing the intersection of Christianity and libertarianism.
Verse of the Day
  Commentary on Today's Verse   Commentary on Proverbs 10:19   (Read Proverbs 10:19)   Those that speak much, speak much amiss. He that checks himself is a wise man, and therein consults his own peace.   Proverbs 10:19 In-Context   17 Whoever heeds discipline shows the way to life, but whoever ignores correction leads others astray.   18 Whoever conceals hatred with lying lips and spreads...
Verse of the Day
  Titus 3:4-7 In-Context   2 to slander no one, to be peaceable and considerate, and always to be gentle toward everyone.   3 At one time we too were foolish, disobedient, deceived and enslaved by all kinds of passions and pleasures. We lived in malice and envy, being hated and hating one another.   4 But when the kindness and love of God...
Verse of the Day
  Deuteronomy 4:29 In-Context   27 The Lord will scatter you among the peoples, and only a few of you will survive among the nations to which the Lord will drive you.   28 There you will worship man-made gods of wood and stone, which cannot see or hear or eat or smell.   29 But if from there you seek the Lord your...
Verse of the Day
  Commentary on Today's Verse   Commentary on Deuteronomy 30:15-20   (Read Deuteronomy 30:15-20)   What could be said more moving, and more likely to make deep and lasting impressions? Every man wishes to obtain life and good, and to escape death and evil; he desires happiness, and dreads misery. So great is the compassion of the Lord, that he has favoured men, by...
Verse of the Day
  Commentary on Today's Verse   Commentary on Philippians 1:27-30   (Read Philippians 1:27-30)   Those who profess the gospel of Christ, should live as becomes those who believe gospel truths, submit to gospel laws, and depend upon gospel promises. The original word conversation denotes the conduct of citizens who seek the credit, safety, peace, and prosperity of their city. There is that in...
Verse of the Day
  Commentary on Today's Verse   Commentary on 1 Corinthians 13:1-3   (Read 1 Corinthians 13:1-3)   The excellent way had in view in the close of the former chapter, is not what is meant by charity in our common use of the word, almsgiving, but love in its fullest meaning; true love to God and man. Without this, the most glorious gifts are...
Verse of the Day
  James 4:1-3 In-Context   1 What causes fights and quarrels among you? Don't they come from your desires that battle within you?   2 You desire but do not have, so you kill. You covet but you cannot get what you want, so you quarrel and fight. You do not have because you do not ask God.   3 When you ask, you...
Verse of the Day
  John 3:18 In-Context   16 For God so loved the world that he gave his one and only Son, that whoever believes in him shall not perish but have eternal life.   17 For God did not send his Son into the world to condemn the world, but to save the world through him.   18 Whoever believes in him is not condemned,...
Related Classification
Copyright 2023-2025 - www.mreligion.com All Rights Reserved