Home
/
RELIGION & LIBERTY ONLINE
/
Explainer: Puerto Rico’s Financial Crisis
Explainer: Puerto Rico’s Financial Crisis
Jan 25, 2026 8:00 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
Catholics and Libertarians: Allies or Enemies?
Even though the author of this essay in Catholic World Report is careful to make distinctions, this would seem to be the choice: Thomas Aquinas or Ron Paul. It is, in fact, how the indispensable Real Clear Religion website framed the debate this morning. pare a religion with an intellectual and moral tradition that goes back thousands of years with a quasi-political movement that is more known for what it is against than what is for is worse paring apples...
‘Good Morning, I’m A Rapist; Can You Help Me Out Here?’
How easy is it for a 33 year old man to buy Plan B for his 15 year old “girlfriend?” Not too hard at all. In fact, the folks in this video from Students for Life don’t bat an eye – even when he makes it clear how old he is and how young his “girlfriend” is. Keep in mind that there is no state in the U.S. where it is legal for a 33 year old to have sexual...
Don’t Fret About the Premium Increases, You Can Just Pay More in Taxes to Subsidize Yourself
Yesterday I was reading an article about Obamacare in the Washington Post. . . Whether they know about that financial help is a different question, as many have had trouble using HealthCare.gov to figure out how much insurance would cost under the Affordable Care Act. And the study does not include information on whether those subsides would lead to lower premiums for shoppers buying in the health law’s new exchanges. “There’s no question that when people get better coverage it...
Catharsis and ‘Catching Fire’
Today at Ethika Politika, Elyse Buffenbarger weighs in on violence and voyeurism in The Hunger Games: Flipping between reality television and footage of the war in Iraq, Susan Collins was inspired to pen The Hunger Games. The dystopian young adult trilogy has been a runaway success both of page and screen: book sales number in the tens of millions, and in 2012, the first film took in nearly $700 million worldwide. (The next film, Catching Fire, releases tomorrow.) Initially, I...
So, Why Exactly Doesn’t Healthcare.gov Work?
The Obama Administration has stated that 106,000 people have managed to sign up for health care on the Healthcare.gov site, a site 3-1/2 years in the making. Both HHS Director Kathleen Sebelius and Deputy Chief Information Officer for the Center for Medicare & Medicaid Services, Henry Cho, have been grilled by mittees as to the incredibly poor performance of the website. What exactly went wrong? NPR’s All Tech Considered breaks it down. There are two popular methods of software development....
‘Get Your Hands Dirty’: The Importance of a Rightly Ordered Life
At the Values & Capitalism blog, Jacqueline Otto Isaacs reviews Jordan Ballor’s Get Your Hands Dirty. Isaacs explains how Ballor articulates a vision for the proper orientation for our lives: In his recent release, “Get Your Hands Dirty,” Jordan Ballor of the Acton Institute lays out a clear case for why Christians ought to have rightly ordered lives and what that might look like. While the book took shape around a collection of essays, this message was as hard to...
Seattle Socialist Goes Wobbly Over Boeing
While we’ve grown accustomed to finding conservatives longing for a mythical Mayberry-era that never, in fact, actually existed, we expect those on the left to be perpetually forward-looking. So it’s rather disconcerting to see ‘progressives’ get nostalgic for the mostly mythical past. Usually such longing for the good ol’ es from ex-hippies missing the free love and cheap drugs of the 1960s. But on rare occasions the radical left dips back even further. Like to the 1930’s-era anarcho-syndicalism of the...
Israel Really Wants A King (Part I)
I recently posted some thoughts at The Power Blog on “God’s Problem With Centralized Power”, which took a macro view of what I believe to be God’s clear disdain for mankind pursuing their own ends instead of His articulated purposes when es to how we organize munally. This time I want to highlight a specific, micro-level example of that same general idea. The story of Israel’s demand for a king inI Samuel 8contains so many relevant, interesting nuggets of insight...
‘They’re Always Coming To You Offering You More Programs’
An exceedingly honest woman called into an Austin, Texas, radio talk show, KLBJ, to discuss why she chooses not to work. She, her husband and three children rely on tax dollars for shelter, utilities and food. She admits that her parents did not work either, and that free money and programs were offered all the time. And what’s wrong with that? [product sku=1177] ...
Evangelicalism, Large Cities, and the ‘Other’ Christians
One of the profound realities of theology and ecclesiastical enclaves in which American Christians live is each tribal subculture views the world as if Christianity begins and ends with their tribe. Evangelicals are a great example of this trend. Some evangelicals write as if they are the only Christians doing God’s work in the world. For example, Joy Allmond recently wrote a perplexing article about New York City asking “Is New York City on the Brink of a Great Awakening?”...
Related Classification
Copyright 2023-2026 - www.mreligion.com All Rights Reserved