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QuickTake

Puerto Rico’s Debt

A Puerto Rican flag is seen painted on the doorway of an abandoned building in San Juan in 2016.
Photographer: Erika P. Rodriguez/Bloomberg
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Puerto Rico has the population of Connecticut and an economy smaller than Nebraska’s. It also has more debt — $74 billion — than any U.S. state government except California, New York and Massachusetts. The debt, a result of financial mismanagement, Wall Street complicity and good intentions gone awry, will limit the territory’s ability to rebuild after being destroyed by a hurricane. New questions as to whether the hobbled island will be able to repay weigh on investors far beyond the Caribbean island.

Puerto Rico was already struggling with its debt load when Hurricane Maria hit on Sept. 20. After President Donald Trump toured damaged sites on the island Oct. 3, he said of the debt “we’re going to have to wipe that out,” though his budget director said this shouldn’t be taken literally. The federal oversight board created by the U.S. Congress in 2016 to manage Puerto Rico’s finances has asked Congress for “maximum federal assistance” to help repair what could be $95 billion in damages. This, the board noted, is roughly 150 percent of the island’s annual gross national product. The board had previously filed a bankruptcy-like case in May 2017 to slash the island’s debt. This restructuring, the biggest ever by a U.S. state or local government, followed Puerto Rico’s failure to craft a restructuring deal with its creditors. Washington took action after Puerto Rico stated in 2015 that it was unable to pay its borrowings and the defaults began to pile up. Unlike the bonds of most states and municipalities, Puerto Rico’s are exempt from local, state and federal taxes everywhere in the U.S., making the debt attractive to mutual funds. As a result, they were once held by about half of open-end muni funds. (They’re now mostly held by hedge funds and big investment firms betting they’ll rebound.) The competitive advantage made it easy for Puerto Rico to double its debt in 10 years by selling bonds to plug annual budget deficits and pay for operating expenses — the same combination that brought New York City to the brink of bankruptcy in the 1970s.