JIM ZARROLI, BYLINE: Like Greece, Puerto Rico saw its economy weaken substantially during the past decade. Its unemployment rate soared. For a while, Puerto Rico borrowed heavily to keep up government spending, but over time, it couldn't get out of the fiscal hole it had dug. David Tawil is president of Maglan Capital, which purchases distressed government debt.
DAVID TAWIL: Greece seems to have some pretty fundamental headwinds that it faces, you know, in terms of its economy, in terms of its tax collection, in terms of its pension burden. Puerto Rico has a lot of those same types of issues.
ZARROLI: Today, Puerto Rico was unable to pay its debts and its governor says he will ask its creditors for more time. While the Treasury Department isn't commenting on Puerto Rico's problems, there have been published reports that the island is seeking a loan from the federal government. With the bond markets all but closed to the commonwealth, any solution to Puerto Rico's troubles is likely to involve some type of federal help. Economist Arturo Porzecanski teaches at American University.
ARTURO PORZECANSKI: What Greece is for the eurozone, that's what Puerto Rico's going to become for us. It is going to become a territory which we're going to have to subsidize even more than before, give more tax breaks; eventually give federal aid.
ZARROLI: But there are important differences that mitigate Puerto Rico's risk to the financial system. Puerto Rico is a tiny part of the U.S. economy, even smaller than Greece is to the eurozone. And because the island a U.S. territory, its banks are already guaranteed by the Federal Deposit Insurance Corporation. That prevents the kind of bank runs now plaguing Greece. David Tawil says the mutual funds and banks that invested in Puerto Rican bonds have had ample warning about the island's troubles and many sold off their holdings at a loss long ago.
TAWIL: The fact that we - the market has had such a heads up for so long has allowed anyone who's wanted to bail on the sinking ship, so to say, to get out. And those folks that see opportunity, you know, went in with eyes wide open.
ZARROLI: Many of those who still hold Puerto Rican bonds are distressed debt investors who bought them cheap and are hanging on in hopes of making a killing. If Puerto Rico isn't the kind of systemic problem that Greece has been, it does present policy challenges to the federal government. Former IMF economist Andrew Wolfe is one of the authors of a report on Puerto Rico that was released today.
ANDREW WOLFE: The interesting dilemma I think for the U.S. Treasury is, you know, what type of assistance can they give and what precedent does it send to other distressed states, let's say, that may come down the pipe.
ZARROLI: Wolfe says there are a lot of cities and states in fiscal trouble right now. As conditions on Puerto Rico deteriorate, they'll be watching to see what kind of help Washington prides. And Washington will want to avoid sending signals that it's ready to provide bailouts to all who find themselves in trouble. Jim Zarroli, NPR News, New York.
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