Alas for Puerto Rico, the Caribbean commonwealth attracts little attention on the U.S. mainland except when it’s in trouble. So it is with the looming crisis over Puerto Rican public debt, estimated at $70 billion. Detroit’s bankruptcy was bad for the municipal bond market; a default by Puerto Rico, though unlikely, could be worse: Some 70 percent of U.S. municipal-bond mutual funds hold the island’s paper, which bears tax-free interest. Large U.S. bond insurers are heavily exposed as well.
How Puerto Rico got into this mess is a long story, with plenty of villains: The island’s government frittered away funds on unproductive investments and bloated payrolls; Wall Street bankers enabled more borrowing, collecting $880 million in fees since 2000; the U.S. government’s policy of tax-free status for Puerto Rico bonds, meant to boost its economic development, subsidized the island’s habit of living beyond its means.
And last but not least is the near-collapse of economic growth. Puerto Rico’s output has declined 16 percent since 2004. Its recession, triggered by the 2006 phaseout of a federal manufacturing tax break, began before that of the mainland and lasted longer. Only about a million of Puerto Rico’s 3.6 million people are employed. Not coincidentally, Puerto Rico’s population shrank 4 percent in the past decade, as many of the best and brightest sought opportunity on the U.S. mainland.
Newly elected Gov. Alejandro Garcia Padilla has raised the retirement age and pension contributions for public employees and broadened the sales-tax base; his government’s current budget calls for $750 million in borrowing, the smallest amount since at least 2009. Even assuming it meets that target, Puerto Rico would still be spending too much on short-term needs such as interest payments and the public-sector payroll.