Photographer: Christopher Gregory/Bloomberg

On Eve of Default, Puerto Ricans Are Broke and Feel Out of Luck

  • Islanders expect more pain whatever Congress, creditors decide
  • Decade of economic drift is `no one's fault, everyone's fault'

Opposite the headquarters of Puerto Rico’s power company, Nelson Jimenez is selling lottery tickets. He’s not fooled by the shiny facade across the street, with its glass-and-metal curves.

The island is “broke” and business is bad, Jimenez says, gesturing at his thick wad of unsold tickets -- testimony to a public feeling down on its luck. Then he looks over to the utility building: “They made a lot of money, and there were lots of bonds. But not anymore.”

The Puerto Rico Electric Power Authority in San Juan.
The Puerto Rico Electric Power Authority in San Juan.
Photographer: Christopher Gregory/Bloomberg

Of course, Puerto Rico still has bonds -- about $70 billion outstanding. What it’s short of is cash to repay them with. The indebted Caribbean island, home to 3.5 million U.S. citizens, has juggled dwindling resources from one hand to another for months now, to keep creditors at bay. The crisis is set to tip into a new phase this weekend when $422 million of payments are due and, as things stand, unlikely to be made in full -- threatening the biggest default yet.

Cue a flurry of activity in New York, where hedge funds are consulting their lawyers, and in Washington, where lawmakers are wrangling over a rescue package. Congress failed to come up with one by this weekend’s deadline, when the island’s Government Development Bank, which lends money to the local authorities that run schools and other services, is the potential defaulter. Some of its bonds trade at just 20 cents on the dollar, amid last-ditch talks to defer payments.

‘Everyone’s Fault’

The next key date is July 1 when $2 billion falls due, including so-called general obligation bonds that have the highest level of guarantees. Missing those payments would deepen the worst crisis to hit the $3.7 trillion U.S. municipal market.

“It’s no one’s fault, but it’s everyone’s fault -- the current government, the one before that, and the one before that,” said Mario McCann, a 52-year-old entrepreneur in the capital San Juan, at his food truck. Perched above the surfer beach at La Ocho, it serves the cuisine of Puerto Rico’s central mountains, famous for their pork farms.

McCann also co-owns a Steve Madden shoe store, but said he’ll probably have to close it because “people are cutting corners here and there, especially in luxury goods.”

If some kind of aid doesn’t materialize by July, Puerto Rico could become the first state-level defaulter since Arkansas in 1933 -- even though it’s not a state but a territory attached to the U.S. as one of the spoils of victory in the 1898 Spanish-American war. That unique status has added to its difficulties: unlike, say, Detroit, Puerto Rico can’t get bankruptcy protection.

‘A Not-Quite-Nation’

“A commonwealth with not a lot of wealth, a not-quite-nation,” the Puerto Rican musical star Lin-Manuel Miranda called his homeland. Miranda, the creator of the Broadway hit “Hamilton,” was rapping on U.S. television -- and urging Washington to help out: “Vulture funds are circling and lobbying for payouts. There’s nothing left to tax or cut, we’re stuck, we need a way out.”

On the island, Miranda’s a social-media megastar, and the popular NotiCel news website quickly subtitled his rap into Spanish. Those last few words, in particular, resonate after what’s now a lost decade. While the U.S. slowly recovered from the recession that struck in 2008, Puerto Rico’s decline has been unrelenting, even as the government ran up debt in a bid to keep the economy afloat. Unemployment is 11.7 percent and the labor participation rate paints an even grimmer picture, barely above 40 percent. Foreclosures have almost doubled since 2008, and people are leaving: the population shrank 1.7 percent last year alone.

Both parties in Congress say whatever rescue package emerges won’t be a “bailout.” They’re still discussing key details: how debt restructuring will work, and what kind of external oversight will be imposed on the island’s finances. Republicans have called for a reduction in the minimum wage to below the national level, to reflect the fact that median household incomes in Puerto Rico are about half those of Mississippi, the poorest state.

They’re probably even lower for residents of La Perla, where roosters strut around the ramshackle, brightly colored houses that slope down toward the waves. There’s money there, too -- it’s a neighborhood with a reputation for drug sales, and some fancy cars are on display. But most people are struggling, says Jorge Moreno, a 25-year-old school security guard. He’s worried about the Congress wage plan. “Everything is going up in price, except my salary,” he said.

‘Make Ends Meet’

Puerto Rico’s desperate search for revenue has seen it raise sales taxes to 11.5 percent, the highest in the U.S. Other charges have been imposed too, prompting a lawsuit from Wal-Mart Stores Inc., which called its overall tax burden “astonishing and unsustainable.” Prepa, the electricity company where Jimenez was selling his lottery tickets, is set to levy extra fees from customers as part of a deal with creditors to stay current on its $9 billion of debt.

While Wall Street and Washington may think of Puerto Rico as a financial morass, to most Americans it’s a vacation destination. On Wednesday there were two big cruise ships docked in San Juan, and merchants and taxi drivers lined up around the harbor. David Quiros Solorzano was there, hoping to sell some jewels. Tourism has escaped the worst of the crisis, the 26-year-old street vendor said: “These cruise ships have contracts.”

Even those could be at risk. Health officials have warned that the mosquito-borne Zika virus threatens to sweep through Puerto Rico on its way north from Brazil. There have already been more than 100 cases.

With their prospects darkening, many Puerto Ricans have concluded that it’s time to jump ship for the mainland. Jose Rodriguez, a 27-year-old waiter-cum-cook, says several of his family have left. Those friends who haven’t are working any odd job they can get: selling coconuts, or collecting scrap metal.

“It’s the everyday people that have to suffer,” Rodriguez said, sitting outside the restaurant where he works in the cobbled streets of Old San Juan. “One way or another, we’re all just going to have to make ends meet.”

Watch Next: Puerto Rico's Swelling Debt

QuickTake: Puerto Rico's Swelling Debt
Before it's here, it's on the Bloomberg Terminal. LEARN MORE