Puerto Rico Debt Crisis Could Lead to Catastrophy

Administration officials are warning of a humanitarian crisis if Congress does not move to address Puerto Rico’s debt crisis.

The island territory is not only unable to make debt service payments on about $70 billion in debt, but is struggling to fund public safety, health and education, according to Antonio Weiss, counselor to Treasury Secretary Jacob Lew. The worry is that the lack of money could have catastrophic consequences for Puerto Ricans.

“Puerto Rico is already in distress, what started as a recession has turned into a fiscal and a liquidity crisis that shows signs of becoming a humanitarian one as well,” Weiss told a House panel last week.

While House Speaker Paul D. Ryan has given the House until March 31 to address Puerto Rico’s crisis, some Republicans on Capitol Hill are questioning the Obama administration’s proposal to allow the island’s government to, in effect, declare bankruptcy.

Rep. Tom McClintock, R-Calif., said that allowing Puerto Rico to walk away from a portion of its debt through a bankruptcy-like process would undermine the sovereign debt of the other 50 states.

“I’m afraid that credit markets are going to say, ‘Well, wait a second. If they can do that to the Puerto Rican debt, they can do that for California and Illinois and New York,’” McClintock said.

A number of governors have suggested that investors will demand that states pay higher interest rates if Puerto Rico’s debt is restructured, he noted.

Weiss, though, said that proposed legislation would cover U.S. territories, of which Puerto Rico is one, and not states. The administration has talked to bond investors about the plan and they understand this. Those investors have said that any move to curb Puerto Rico’s crisis – and its continuing and projected defaults on bond payments – would help calm the fears of investors who put money into state bonds, he says.

It’s easy to understand the concerns about the island’s trajectory from a few numbers. Puerto Rico’s unemployment rate is still 12.2 percent, almost double the rate of 6.8 percent in Mississippi, the state with the highest rate, according to data from the Bureau of Labor Statistics.

Puerto Rico’s unemployment rate has dropped from more than 16 percent to its current level, but not because businesses are creating jobs there. Driving the decline in the unemployment rate is the island’s unprecedented depopulation.

Between 2010 and 2015, the U.S. population increased 4 percent, or 12.7 million people. Nearly 60 percent of the increase came from births outnumbering deaths, with the rest coming from immigration.

Over the same period, Puerto Rico lost 7 percent of its population. Births outnumbered deaths by 44,000, but one out of every 13 people left the island, a total of 296,000 who emigrated. If they had not left the island, causing the labor force to shrink, and if businesses had created the same number of jobs, the island’s unemployment rate would have ballooned to 29 percent.







By Doug Sword

Puerto Rico Debt Crisis Could Lead to Catastrophy