Home
/
RELIGION & LIBERTY ONLINE
/
Explainer: Puerto Rico’s Financial Crisis
Explainer: Puerto Rico’s Financial Crisis
Sep 9, 2025 7:43 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
Rev. Sirico on Francis’ ‘Year of Mercy’
Pope Francis recently announced a “year of mercy,” making it easier for the Catholic Church to forgive women for having abortions. Acton’s President and Co-founder Robert Sirico went on WSJ Live to discuss this. Watch below: ...
Catholicism’s tension with the Enlightenment
In a recent article for The Stream, Acton’s Director of Research, Samuel Gregg asks the question, “Is Catholicism Compatible with the American Experiment?” Gregg cites an article by political philosopher Patrick Deneen who suggested that “the main argument among American Catholics will concern the relationship of modern liberal democracies–and, at a deeper level, the American Founding–with Catholicism.” Gregg doesn’t necessarily disagree with this assertion, but argues that it “reaches further back to the early modern period often called the Enlightenment.”...
Creation Care and Catholic Social Teaching
Pope Francis recently declared September 1 as the World Day of Prayer for the Care of Creation, an annual day of prayer begun by the Orthodox Church in 1989. In conjunction with the event, Catholic Relief Services and the United States Conference of Catholic Bishops have released “Care for God’s Creation,” the first of a seven-part video series on Catholic social teaching. (Via: Crux) ...
Should We Keep God’s First Commandment by Eating More Bugs?
The very mand God gave to humanity was to “Be fruitful and increase in number; fill the earth and subdue it” (Genesis 1:28). Overall, I’d say we’re doing a pretty good job on that “increase the number” since we currently have over 7.3 billion people on the planet. Where we fall short of keeping mand is in the “subdue it” part. As the ESV Study Bible explains, Here the idea is that the man and woman are to make the...
Court Rules March for Life Qualifies for Abortifacient Mandate Exemption Based on Moral, Not Just Religious, Objections
Imagine if the government were to tell an organization dedicated to veganism that, because of a new mandate, they must purchase a meat platter to serve at their monthly meetings and that the chair cushions in their conference room must be made of leather. Appalled by this governmental intrusion, the vegans ask to be excluded from the mandate since none of their members wish to eat bologna while sitting on dead cow skin. They also point out that a group...
Acton Institute Selected as Templeton Freedom Award Finalist for Poverty Inc. Documentary
The Acton Institute has been named as one of six finalists for this year’s $100,000 Templeton Freedom Award for its documentary film, Poverty, Inc. The announcement of the finalists was made Monday by the Atlas Network, a Washington-based organization that advances the work of market-oriented public policy organizations all over the world. The winner will be selected Nov. 12 in New York. Atlas’ description of Poverty, Inc. says the documentary “provides prehensive perspective on the issue, giving voice to charity...
The Moral Dimension of Work
“The world is not a parsimonious place, in spite of the dogmas of the ecologists,” says James V. Schall in this week’s Acton Commentary. Our most unsettling economic problems are actually not economic but moral—moral ones that cannot be simply passed on from generation to generation. They need to be chosen and internalized by each person in each generation at the risk of deflecting material goods from their proper purposes. Work likewise is not exclusively for its own sake. Rather...
Psalm 19 and Human Flourishing
The mission of the Acton Institute is to promote a free and virtuous society characterized by individual liberty and sustained by religious principles. We seek to articulate a vision of society that is both free and virtuous, the end of which is human flourishing. That phrase—“human flourishing”—has e such a buzzword, though, that it’s in danger of losing any real meaning. As Scott Swain says, “Due to its widespread usage across our culture, its susceptibility to multiple meanings, and its...
Can Capitalism Save the Arts?
Capitalism is routinely castigated as an enemy of the arts, with much of the finger-pointing bent toward monsters of profit and efficiency. Other critiques take aim at more systemic features, fearing that the type of industrialization that markets sometimes tend toward will inevitably detach artists from healthy social contexts, sucking dry any potential for flourishing as a result. But what if the opposite is true? I offer the argument over at The Federalist. Free economies introduce their own unique challenges...
Explainer: The Kentucky Clerk Marriage License Controversy
What is the story about? When the Supreme Court handed down the <Obergefell v. Hodges ruling, it made same-sex marriage legal throughout the U.S. and required every state to issue marriage licenses to same-sex couples. Kim Davis, the county clerk in Rowan County, Kentucky, said she could not issue marriage licenses to same-sex couples because of her religious objections. To avoid claims that she was discriminating, Davis stopped issuing all marriage licenses — to both same-sex and opposite sex couples....
Related Classification
Copyright 2023-2025 - www.mreligion.com All Rights Reserved