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F.A.Q. About Puerto Rico’s Debt Troubles 5 Questions About Puerto Rico’s Debt Troubles
(about 20 hours later)
Q. How does Puerto Rico compare to Greece?Q. How does Puerto Rico compare to Greece?
A. The two places may share pristine beaches and balmy weather. But they have less in common when it comes to how their fiscal problems are likely to play out.A. The two places may share pristine beaches and balmy weather. But they have less in common when it comes to how their fiscal problems are likely to play out.
Greece’s financial crisis poses a serious threat to Europe. The European Union and the International Monetary Fund have lent the country hundreds of billions of euros. And the prospect that Greece may exit the eurozone has persistently threatened to destabilize Europe’s economy and the euro currency, driving down global stock markets and sending world leaders scrambling for a solution.Greece’s financial crisis poses a serious threat to Europe. The European Union and the International Monetary Fund have lent the country hundreds of billions of euros. And the prospect that Greece may exit the eurozone has persistently threatened to destabilize Europe’s economy and the euro currency, driving down global stock markets and sending world leaders scrambling for a solution.
Puerto Rico’s fiscal problems, while painful to the island’s 3.5 million residents, do not threaten to spill over as broadly. Even as Puerto Rico’s bonds have lost value with a default looming, the larger United States municipal debt market has barely flinched, allowing cities and states on the mainland to keep borrowing. That stability may explain why the federal government, despite providing some technical support and advice to officials in Puerto Rico, has largely stayed on the sidelines of the debt crisis.Puerto Rico’s fiscal problems, while painful to the island’s 3.5 million residents, do not threaten to spill over as broadly. Even as Puerto Rico’s bonds have lost value with a default looming, the larger United States municipal debt market has barely flinched, allowing cities and states on the mainland to keep borrowing. That stability may explain why the federal government, despite providing some technical support and advice to officials in Puerto Rico, has largely stayed on the sidelines of the debt crisis.
Another big difference is in the comparative safety nets for these economies. Despite some cutbacks, the United States government continues to pump tens of billions of dollars into Puerto Rico to support health care, subsidized housing and policing. Puerto Rico’s banks are backed by the Federal Deposit Insurance Corporation and the Federal Bureau of Investigation plays an outsize role in local law enforcement duties.Another big difference is in the comparative safety nets for these economies. Despite some cutbacks, the United States government continues to pump tens of billions of dollars into Puerto Rico to support health care, subsidized housing and policing. Puerto Rico’s banks are backed by the Federal Deposit Insurance Corporation and the Federal Bureau of Investigation plays an outsize role in local law enforcement duties.
Greece, by contrast, has been falling with much less of a net. While European leaders have been willing to bail out Greece, their support pales next to the oversight and influence Washington exerts over San Juan. Despite its fiscal problems, the island will continue to benefit from the financial help and other forms of assistance of the United States, which should soften some of the fallout from a default.Greece, by contrast, has been falling with much less of a net. While European leaders have been willing to bail out Greece, their support pales next to the oversight and influence Washington exerts over San Juan. Despite its fiscal problems, the island will continue to benefit from the financial help and other forms of assistance of the United States, which should soften some of the fallout from a default.
Q. How is Puerto Rico different from a state?Q. How is Puerto Rico different from a state?
A. Puerto Rico is a commonwealth of the United States. It is a distinction that, for years, has carried many of the advantages of being a state and few of the downsides. Most notably, Puerto Rico receives federal assistance, but most of its residents do not pay federal personal income taxes.A. Puerto Rico is a commonwealth of the United States. It is a distinction that, for years, has carried many of the advantages of being a state and few of the downsides. Most notably, Puerto Rico receives federal assistance, but most of its residents do not pay federal personal income taxes.
But the lack of statehood is now hurting the island at its time of greatest need. Unlike states, which can authorize their municipalities to declare bankruptcy, Puerto Rico has no such access to bankruptcy courts for its government entities. That has left the island facing a chaotic debt restructuring with no legal referee.But the lack of statehood is now hurting the island at its time of greatest need. Unlike states, which can authorize their municipalities to declare bankruptcy, Puerto Rico has no such access to bankruptcy courts for its government entities. That has left the island facing a chaotic debt restructuring with no legal referee.
While there are proposals on Capitol Hill to give Puerto Rico bankruptcy powers, the island’s status hurts here, too. Puerto Rico’s lone representative in Congress has no vote, which has hampered the bills’ progress.While there are proposals on Capitol Hill to give Puerto Rico bankruptcy powers, the island’s status hurts here, too. Puerto Rico’s lone representative in Congress has no vote, which has hampered the bills’ progress.
Q. Will the United States “bail out” Puerto Rico?Q. Will the United States “bail out” Puerto Rico?
A. The official answer is “no.” A rescue would be too politically risky for either party in Washington, especially after Detroit was forced to sort out its broken finances in bankruptcy without any federal bailout.A. The official answer is “no.” A rescue would be too politically risky for either party in Washington, especially after Detroit was forced to sort out its broken finances in bankruptcy without any federal bailout.
Bailing out a struggling Puerto Rico could create expectations that other troubled local governments around the United States will be saved by loans from Washington. Still, Congress may end up helping in other ways, including through passage of a bankruptcy bill. Even that effort has faced opposition from conservatives who say it amounts to a bailout.Bailing out a struggling Puerto Rico could create expectations that other troubled local governments around the United States will be saved by loans from Washington. Still, Congress may end up helping in other ways, including through passage of a bankruptcy bill. Even that effort has faced opposition from conservatives who say it amounts to a bailout.
Puerto Rico officials have also floated the idea that the Treasury Department could guarantee the island’s debt when it seeks to borrow in the market again — helping to lower the cost significantly.Puerto Rico officials have also floated the idea that the Treasury Department could guarantee the island’s debt when it seeks to borrow in the market again — helping to lower the cost significantly.
Q. How did Puerto Rico get here?Q. How did Puerto Rico get here?
A. For years, the commonwealth borrowed too much money, trying to paper over declining government revenue and prevent deep cuts in services and layoffs of public workers. Puerto Rico easily found lenders willing to extend the government more debt. The bonds made for hot investments across the mainland United States because the interest is often “triple tax exempt,” meaning the holder does not pay state, federal or city income taxes.A. For years, the commonwealth borrowed too much money, trying to paper over declining government revenue and prevent deep cuts in services and layoffs of public workers. Puerto Rico easily found lenders willing to extend the government more debt. The bonds made for hot investments across the mainland United States because the interest is often “triple tax exempt,” meaning the holder does not pay state, federal or city income taxes.
But all that debt, now totaling $72 billion, couldn’t solve the structural problems in Puerto Rico’s economy: high labor costs and shipping costs, an exodus of educated people to the mainland United States and the expiration of a special federal tax credit meant to attract big corporations to the island and keep them there.But all that debt, now totaling $72 billion, couldn’t solve the structural problems in Puerto Rico’s economy: high labor costs and shipping costs, an exodus of educated people to the mainland United States and the expiration of a special federal tax credit meant to attract big corporations to the island and keep them there.
Q. Who stands to lose the most from defaults?Q. Who stands to lose the most from defaults?
A. Puerto Rico bonds had been held widely by mutual funds on the mainland United States. But that concentration has shifted, as hedge funds have bought up as much as a quarter of the debt. While many of these funds bought the debt at distressed prices, an additional hit to bond values could ruin their investments.A. Puerto Rico bonds had been held widely by mutual funds on the mainland United States. But that concentration has shifted, as hedge funds have bought up as much as a quarter of the debt. While many of these funds bought the debt at distressed prices, an additional hit to bond values could ruin their investments.
Another vulnerable group consists of Puerto Rico residents who have sunk much of their wealth into local bonds and decimated their retirement savings.Another vulnerable group consists of Puerto Rico residents who have sunk much of their wealth into local bonds and decimated their retirement savings.
Moreover, a default could prevent Puerto Rico from having access to the debt market for several years, forcing the government to put off projects to build or rebuild bridges, roads, schools and other crucial infrastructure.Moreover, a default could prevent Puerto Rico from having access to the debt market for several years, forcing the government to put off projects to build or rebuild bridges, roads, schools and other crucial infrastructure.