Puerto Rico’s Debt Crisis Keeps Getting Worse; U.S. Lenders Become Anxious

As bad as Greece’s debt crisis is at the moment, the global finance industry is far from reaching a stable position; Puerto Rico is next up to bat, and this little island is already gearing up for an ugly debt restructuring battle.

Compared to the U.S. national consumer debt, which sits over $11 trillion right now, Puerto Rico’s $72 billion seems like nothing. But according to Bloomberg, the U.S. commonwealth territory — with a popular of just 3.5 million — has had a higher debt per capita than any other state or U.S. territory.

As Al Jazeera reported, Puerto Rico’s debt crisis has been gaining speed since the early 2000s, when immigrants began flocking to the U.S. mainland. Unemployment rates skyrocketed, budget cuts hit the island’s educational system, and healthcare was so neglected that Puerto Rico is now dealing with an HIV epidemic.

Most recently, the Wall Street Journal reported, bondholders began taking advantage of Puerto Rico’s disintegrating economy back in 2014: economists predicted that Puerto Rico wouldn’t be able to repay its debts in the coming year or two, and because it’s a commonwealth — not an independent country — it can’t declare bankruptcy.

Lenders knew that Puerto Rico would have to choose between defaulting on its loans or turning to the U.S. for a bailout plan; the real problem at hand is the fact that Puerto Rico expects to lose even more of its tax-paying citizens, making it difficult to create a realistic plan for stabilizing the island’s financial markets.

So what’s most likely to happen from here?

At the moment, Bloomberg reports, Puerto Rico is running out of money; its fiscal year ended on June 30 and government documents estimate that the budget gap is possibly as high as $740 million.

Because Puerto Rico doesn’t have the option to declare bankruptcy, it will not be given the opportunity of restructuring its debts, and therefore could be facing many lawsuits from individual lenders who are not willing to accommodate a new payment plan.

Beyond just financial restructuring, the WSJ notes that Puerto Rico’s political situation is also too weak at the moment to support its economy. If the commonwealth stabilizes enough, it’s possible that Congress could give Puerto Rico the ability to declare Chapter 9 bankruptcy — but only if it can be sure that the Puerto Rican government won’t continue overspending.

In other words, Puerto Rico’s debt crisis will likely take a long time to iron out.

Author: GWOB

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