Home
/
RELIGION & LIBERTY ONLINE
/
Explainer: Puerto Rico’s Financial Crisis
Explainer: Puerto Rico’s Financial Crisis
Apr 27, 2026 3:02 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
Ethical employment
What do you look for when you are searching for a job? A growth industry? A healthy bottom-line? A positive corporate culture? bination of the above? Fortune magazine recently rated the “Top 100 Places to Work.” Not surprisingly, at the top of the list is Google, which not only is dubbed the “millionaire factory” because of its generous stock option packages and a matching top tier share price, but because of the innovation associated with its workplace. Employees are encouraged...
Global warming consensus alert: New, shocking data!
It’s been a while since we’ve had a GWCW update, so here are links to a couple of articles I just ran across at Watts Up With That: RSS Satellite data for Jan08: 2nd coldest January for the planet in 15 yearsArctic sea ice back to its previous level, bears safe; film at 11 That second post is especially interesting considering the breathless media reports about endangered polar bears in danger of drowning as the ice melts from under their...
Colorado Catholic Charities controversy III
An update on the battle between Archbishop Chaput and the Colorado legislature over an ostensibly anti-discrimination bill that in fact infringes on religious liberty. (Acton’s Joseph Kosten ably defined the argument in this mentary; I initially raised it here.) Zenit reports on the back and forth between Chaput and the Anti-Defamation League’s Bruce DeBoskey, with Catholic Charities president Christopher Rose wading into the fray. Here’s Rose on the idea that laws forbidding government to discriminate on religious grounds apply to...
February Acton Notes
A new Acton Notes is now available online. Acton Notes is a monthly newsletter published by the Acton Institute. This month’s issue features an article by Rev. Robert Sirico, president of the Acton Institute, about Socialism. Rev. Sirico points out a couple of ways in which to confront those who mistakenly hold to the fashionable ideology. If a person identifies with the idea mon ownership of the means of production, point out that this is impossible because you hold no...
Campaigning for state involvement in education
I came across a troubling essay in this month’s issue of Grand Rapids Family Magazine. In her “Taking Notes” column, Associate Publisher/Editor Carole Valade takes up the question of “family values” in the context of the primary campaign season. She writes, The most important “traditional values” and “family values” amount to one thing: a great education for our children. Education is called “the great equalizer”: It is imperative for our children to be able pete on a “global scale” for...
Acton on religious liberty and Huckabee’s economics
Two new mentaries this week: In “Religious Liberty and Anti-Discrimination Laws,” Joseph Kosten looks at recent controversies in Colorado and Missouri involving Roman Catholic institutions. Without the liberty to decide who represents its views and who disperses its message to the public, a religious institution or organization lays bare its most vulnerable aspect and es destruction from within. Separation of church and state does not mean that religious institutions may not function within a state, nor does it mean that...
Knowing the Gardener II – abiding and bearing fruit
Knowing the Gardener was a look at the “big picture” distinguishing God’s intent for Christian creation care from the rest of environmentalism. But I must tell you friends, there’s a huge pitfall out there to avoid. It’s a pit God’s been tirelessly digging me out of for some time now. Paul points to it in Romans 8: There is therefore now no condemnation to them which are in Christ Jesus, who walk not after the flesh, but after the Spirit…...
Oh, what might have been!
From a review in the New Yorker magazine (HT) of David Levering Lewis, God’s Crucible: Islam and the Making of Europe, 570 to 1215, in which the author clearly regrets that the Arabs did not go on to conquer the rest of Europe. The halting of their advance was instrumental, he writes, in creating “an economically retarded, balkanized, and fratricidal Europe that . . . made virtues out of hereditary aristocracy, persecutory religious intolerance, cultural particularism, and perpetual war.” It...
‘Casino capitalism’ or personal failure?
Two weeks ago, French bank Société Générale announced that off-balance sheet speculation by a single “rogue trader” had cost pany 4.9 billion Euros ($7.2 billion). The scandal had enormous repercussions in international markets leading mentators to decry the rotten nature of global “casino” capitalism and to call for the reversal of financial liberalization. However, the actual circumstances of the case do not justify more government intervention in financial markets but illustrate individual moral failings and poor internal governance on behalf...
Question: Which blog is best?
Help Acton do well in the 2008 Blogger’s Choice Awards by submitting a vote or two for Acton. We’re nominated in the following categories (you may vote for Acton in each if you’d like or if you feel we deserve it): • Best Blog Design • Best Religion Blog • Best Charity Blog Voting for a blog does require registration, but it doesn’t take long to do. I’ll occasionally post reminders about this here so that those of you who...
Related Classification
Copyright 2023-2026 - www.mreligion.com All Rights Reserved