How Did Puerto Rico Get Into So Much Debt?

The debt issue in Puerto Rico has numerous causes. Investors in Puerto Rican municipal bonds, in particular, have benefited from preferential tax treatment for many years. This perk was taken advantage of by bond investors from all 50 states who purchased Puerto Rican bonds. When a government issues bonds, it is essentially lending money to bondholders with interest. Puerto Rico issued too much bond debt, owing in part to the tax benefit, and began relying on borrowed cash from bond issues to balance its budget.

Puerto Rico’s economic deterioration has resulted in growing fiscal deficits over time. The little island lacks the necessary infrastructure to manufacture and produce things. Due to its preferential tax status, the island’s economy has been maintained for decades by the presence of technology and service-oriented businesses. However, many of Puerto Rico’s tax benefits were only temporary. The US tax code stipulated that these benefits would expire over time. When this started to happen, businesses left the island, decimating its economy.

What caused the economic crisis in Puerto Rico?

The reasons for the island’s current economic woes are complex, and there is plenty of blame to go around: federal funding shortfalls and tax policies that stifle economic growth, the island’s poor budget practices, predatory lending by hedge funds, and the complicated and frequently unjust relationship between the United States and the island.

Who owns Puerto Rican debt?

Residents of Puerto Rico possess almost $30 billion, or around 42 percent of the island’s outstanding debt. They, along with local businesses, are the ones who are most affected by the government’s budget cuts and tax hikes enacted to stabilize the island’s finances. CNBC’s Michele Caruso wrote on January 24, 2014, that “Almost everything and everyone had their taxes and fees raised. Personal income taxes, corporation taxes, sales taxes, sin taxes, and insurance premium taxes were all raised or imposed for the first time. Instructors’ retirement age was increased from 47 to at least 55 for current teachers and 62 for new teachers.” For a country with a purchasing power parity (PPP) per capita of $16,300 and 41% of the population living in poverty, this is a considerable expense to bear. The legislative assembly and the governor also worked jointly to decrease operational deficits and restructure the pension systems for public employees, teachers, and judges. They also stated their intention to cut appropriations by $170 million in the current fiscal year and budget for balanced operations in the future fiscal year. On March 3, 2014, Puerto Rico’s 17th Legislative Assembly passed a bill allowing the Puerto Rico Government Development Bank to issue $3.5 billion in bonds in order to recover its liquidity. The bill was quickly signed by the Governor the next day, and it became Act 34 of 2014. (Pub.L. 2014-34).

How far is Puerto Rico in debt?

The public debt of Puerto Rico could be lowered from $70 billion to $34 billion, with debt from the Public Buildings Authority and general obligations bonds cut from $18.8 billion to $7.4 billion.

What is the major cause of poverty in Puerto Rico?

Puerto Rico remains in desperate need of assistance, with unemployment and debt at all-time highs. The main reasons of poverty in Puerto Rico are government overspending and legislative unwillingness to reform laws to benefit the island.

Why is Puerto Rico rich?

The World Bank classifies Puerto Rico’s economy as a high-income country, while the World Economic Forum ranks it as Latin America’s most competitive economy. Manufacturing, particularly pharmaceuticals, textiles, petrochemicals, and electronics, are the main drivers of Puerto Rico’s economy, followed by the service industry, particularly finance, insurance, real estate, and tourism. Puerto Rico’s geography and political status are both determining factors in its economic prosperity, owing to its small size as an island; its lack of natural resources used to produce raw materials, and thus its reliance on imports; and its relationship with the US federal government, which controls its foreign policies while imposing trade restrictions, particularly in the shipping industry.

On a macroeconomic level, Puerto Rico has been in a state of economic depression for 15 years, beginning in 2006 after a series of negative cash flows and the expiration of the U.S. Internal Revenue Code’s section 936, which applied to Puerto Rico. This section was critical for the island’s economy because it established tax exemptions for U.S. corporations that settled in Puerto Rico and allowed its subsidiaries operating on the island to send earnings to the parent corporation at any time without having to pay federal tax on corporate income. Puerto Rico, on the other hand, has remarkably managed to keep inflation low during the last decade. Academically, the majority of Puerto Rico’s economic woes stem from federal regulations that have expired, been repealed, or no longer apply to the island; its inability to become self-sufficient and self-sustaining throughout history; its highly politicized public policy, which tends to change whenever a political party gains power; and its highly inefficient local government, which has amassed a public debt equal to 66 percent of its gross domestic product.

Puerto Rico has a lower poverty rate than the poorest state in the US, with 45 percent of the population living below the poverty line. When compared to the rest of Latin America, Puerto Rico has the highest GDP per capita. The Commonwealth has a tremendous bond debt that it can’t service, totaling $70 billion in early 2017, or $12,000 per capita, at a time when its unemployment rate (8.0 percent in October 2018) is more than double that of the mainland. During a decade-long recession, the debt had been rising. To avoid a bankruptcy-like procedure under PROMESA, Puerto Rico must establish restructuring agreements with creditors. More specifically, since 2016, Puerto Rico has been in an unusual situation: its economy has been overseen by a federal board that is handling finances and assisting in regaining access to capital markets.

The commonwealth has a modern infrastructure, a significant public sector, and an institutional framework governed by the regulations of US federal agencies, the majority of which are present and operating on the island. The United States, Ireland, and Japan are its key commercial partners, with the majority of its products coming from East Asia, primarily China, Hong Kong, and Taiwan. In 2016, new trading partners were added, with import trade with Puerto Rico beginning in Singapore, Switzerland, and South Korea. Puerto Rico’s global reliance on oil for transportation and electrical generation, as well as its reliance on food imports and raw materials, renders the island fragile and highly reactive to global economic and climate changes.

Has Puerto Rico ever voted for independence?

The Puerto Rican independence movement refers to efforts by residents throughout the island’s history to gain full political independence, first from the Spanish Empire from 1493 to 1898, and then from the United States since 1898. Over the years, a number of groups, movements, political parties, and organizations have fought for Puerto Rico’s independence.

On the island, there are a variety of pro-autonomy, pro-nationalism, and pro-independence views and political groups. Organizations fighting for independence in Puerto Rico have tried both peaceful political measures and violent revolutionary activities to attain their goals since the early nineteenth century. The independence movement has not received widespread support from the Puerto Rican public since the second half of the twentieth century, failing to gain traction in both plebiscites and elections. In a 2012 referendum on the status of the country, 5.5 percent voted for independence, while 61.1 percent opted for statehood. In the status referendums in 1967, 1993, and 1998, independence garnered the least support, with less than 4.5 percent of the vote.

In 2012, a fourth referendum was held, with 54 percent of voters choosing to change Puerto Rico’s status, but the federal government did nothing. On June 11, 2017, the fifth plebiscite was held. It had the lowest voter turnout of any status referendum held in Puerto Rico, with only 23% of eligible voters voting. In the referendum, the option of independence won only 1.5 percent of the vote.

The Puerto Rican Independence Party won 13.6 percent of the vote in the 2020 general election, a considerable gain in support from the 2016 general election, when it received only 2.1 percent of the vote. In the 2020 elections, the anti-colonial Movimiento Victoria Ciudadana received an additional 14 percent of the vote.

Does Puerto Rico pay taxes?

Puerto Rico’s taxation comprises of taxes paid to the United States federal government and taxes paid to the Commonwealth of Puerto Rico’s government. Payments to the federal government, both personal and corporate, are made through the Internal Revenue Service (IRS), whereas payments to the Commonwealth government are made through the Department of Treasury of Puerto Rico (Departamento de Hacienda).

Puerto Rico is a U.S. unincorporated territory, and Puerto Ricans are citizens of the United States; nevertheless, Puerto Rico is not a state, but rather a U.S. insular area. As a result, while all citizens of Puerto Rico pay federal taxes, many are exempt from paying federal income taxes. Customs taxes, federal commodity taxes, and federal payroll taxes are all examples of federal taxes in the United States (Social Security, Medicare, and Unemployment taxes).

Employees and businesses in Puerto Rico are not required to pay federal income taxes. Federal legislation

What does Puerto Rico export?

The island’s membership in the United States Customs system facilitates trade, and the United States is by far Puerto Rico’s most important trading partner. Singapore, Japan, Brazil, Ireland, and several European countries are among the island’s major trading partners. Chemicals and chemical products, foodstuffs, and computers and electronics are the main exports. Chemicals and chemical goods, petroleum and coal products, food products, transportation equipment, and computers and electronics are the most common imports.

How much does Puerto Rico owe?

The announcement comes as the board has achieved tentative agreements with bond insurers and opposing bondholder groups to reduce $18.8 billion in debt owed to the government by 61% to $7.4 billion. These deals could allow the Commonwealth of Massachusetts to emerge from bankruptcy this year.

Puerto Rico declared bankruptcy in May 2017, attempting to restructure the majority of the $74 billion in debt owed by the state and its agencies at the time. According to the fiscal plan, Puerto Rico would pay an estimated $1.6 billion in professional fees and expenses to restructure its commitments from fiscal 2018 through fiscal 2026.

When did Puerto Rico bonds default?

Puerto Rico first defaulted on its general obligation bonds in July 2016, when it failed to pay creditors about $1 billion, and it hasn’t made any payments since.

“Working with the Oversight Board to produce a consensual restructuring plan that will hasten the Commonwealth’s exit from bankruptcy, respect the lawful priority of valid public debt, and help ultimately restore capital markets access is a very positive move for Puerto Rico.” Susheel Kirpalani, a Quinn Emanuel Urquhart & Sullivan attorney who represents bondholders in the Lawful Constitutional Debt Coalition, agreed.

According to public disclosures, hedge funds GoldenTree Asset Management, Monarch Alternative Capital, Whitebox Advisors, and Taconic Capital possess nearly $1.4 billion in constitutionally backed debt.

According to a person familiar with the settlement agreement, the proposal, which took about three months to negotiate, is expected to be lodged with the court within 30 days, with bondholders anticipating final approval by early 2020.

The Puerto Rican government issued a statement rejecting the agreement, citing the administration’s strong opposition to pension changes, which are included in the updated budgetary plan on which the restructuring agreement is based.

In a statement, Christian Sobrino Vega, the CEO and president of the Puerto Rico Fiscal Agency and Financial Advisory Authority, said, “Not one word of the PSA (Plan Support Agreement) is considered acceptable to AAFAF.” The Spanish acronym for the agency’s name is AAFAF.

“And we can firmly state that no legislation, executive action, or other administrative approval required from the Puerto Rico government will be taken to implement an agreement that directly or indirectly supports a Plan of Adjustment that decreases payments to our retirees,” Sobrino Vega said.

After being appointed in 2017 to monitor the $73 billion reorganization, which is the largest in the history of the US municipal bond market, the island’s oversight board has made some progress in 2019.

U.S. District Judge Laura Taylor Swain, who is supervising the unprecedented bankruptcy-like proceedings, authorized a plan in February to restructure approximately $17 billion in sales tax-backed bonds, dubbed COFINA for its Spanish name. Senior bondholders received 93 percent of their money back, while junior bondholders received 53 percent.

In addition, the court granted a debt restructure for the Government Development Bank worth roughly $4 billion.

A tentative arrangement for around $8 billion in debt issued by the island’s troubled electric power authority has also been reached. The monitoring board also announced a tentative agreement on Wednesday to restructure more than $50 billion in unfunded pension liabilities.

Is Puerto Rico safe?

Despite this, Puerto Rico is one of the safest Caribbean islands, with a crime rate lower than many U.S. cities. Here are our top safety recommendations when visiting Puerto Rico: 1. Take care of your personal belongings.