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Breaking down Puerto Rico's debt crisis

Puerto Rico is in the midst of one of the worst financial crises in the world today.

Since the U.S. won control of Puerto Rico from Spain in 1898, it should be remembered it is an American crisis as well. While Puerto Ricans don’t pay certain federal taxes and they can’t vote in presidential elections, they are U.S. citizens, use the dollar as currency, and they can join the U.S. army.

The problem is that Puerto Rico is currently staring at $72 billion in debt that is making it difficult for it to pay both its creditors, and basic services for its residents. This brings up the question of how Puerto Rico got to this point and what can be done to resolve the crisis.

There is really not one specific reason Puerto Rico finds itself in the position it is in today, but much of the credit can go to population decline, high unemployment and tax breaks. In 1917, Congress exempted Puerto Rican bonds from taxes even if the bondholders lived outside the island.

Additionally, in 1976, Congress gave tax breaks to U.S. companies that established subsidiaries in Puerto Rico. This made business creation and investment appealing.

Unfortunately it didn’t last. The corporate tax breaks began to be phased out in 1996, and were cut out completely in 2006. This combined with the Great Recession meant massive layoffs and shutdowns.

Furthermore, Puerto Ricans are increasingly migrating to the U.S. mainland making it more difficult to increase jobs and raise tax revenue on the island. GDP for instance has only been positive for Puerto Rico twice since 2006 with a high-point of +.5 in 2006 and a low-point of -3.8 in 2009.

From 2010-2013, an average of 48,000 people have migrated annually to the U.S. This is quadruple the annual amount in the previous three decades. According to a Pew Research Center analysis, 42 percent of those who relocated to the U.S. mainland did so because of job-related reasons, with another 38 percent due to family-related circumstances. In fact since 2006, there are actually more Puerto Ricans living on the U.S. mainland than on the island territory itself.

So why should the average American care?

First, recent migrants from Puerto Rico have lower financial stability than earlier migrants, increasing the likelihood of living in poverty. Secondly, according to Forbes, about 20 percent of U.S. bond funds hold Puerto Rican loans.

So if American investors aren’t paid back what they’re owed or take a cut, the value of Puerto Rican bonds will go down.

Due to these reasons, you would be forgiven if you thought the crisis was being swiftly dealt with. Unfortunately that isn’t the case, and the solution is more complicated than what would be ideal.

First and foremost, the International Monetary Fund (IMF) cannot help Puerto Rico like it has in the past with Greece, Ukraine and Portugal because Puerto Rico is not a country. This means it’s entirely an American and Puerto Rican problem to resolve.

At the moment, Puerto Rico cannot file bankruptcy protection similar to what Detroit did in 2013 because it is not a municipality. If there was such protection it would allow its creditors to get back some of what they are due.

Fortunately, Congress has the ability to change this law, but up to this point has not done so. The primary reason is because it feels as though a bailout would fail to punish Puerto Rico for decades of fiscal mismanagement.

Blame should not be placed entirely on Congress for failing to resolve this crisis though. Both the White House and the Federal Reserve have said they will not provide Puerto Rico a bailout similar to the one the European Union gave Greece in August 2015. This is significant because the Treasury Department was quick to bailout hundreds of American banks after the Great Recession with a reported $200 billion.

Where does this put the crisis now then?

Puerto Rican governor Alejandro García Padilla has said that without a bailout, the only hope it has to get out of debt is to cut public services or convince its creditors to accept cuts.

In September 2015, some of its creditors did just that, accepting a 15 percent loss that allowed a savings of $9 billion for Puerto Rico. It hasn’t been enough though. Puerto Rico was only able to make its debt payment in December 2015 because it took revenue away from highway and infrastructure agencies.

In January 2016, cutting public funding wasn’t enough and Puerto Rico defaulted on nearly $174 million in debt payments. At this rate the Puerto Rican government will be forced to make more cuts to public services creating a whole new set of problems.

U.S. Treasury Department advisor Antonio Weiss has stated “the Commonwealth of Puerto Rico is in the midst of an economic and fiscal crisis, and without federal action, the situation could become a humanitarian crisis as well.” As we have seen, the proposed ideas for federal action have met little support.

Perhaps it’s time to think outside the box and seriously consider the possibility of Puerto Rico gaining statehood or just letting it go.

Follow Jake Pfeifer on Twitter at @jake8922.

Jake Pfeifer

Jake Pfeifer is a regional editor for RiverTown Multimedia, which encompasses the Hastings Star Gazette, Farmington-Rosemount Independent Town Pages, South Washington County Bulletin and Woodbury Bulletin. He previously worked as a sports reporter and outdoors editor for the Red Wing Republican Eagle and as a multimedia artist/editor for Detroit Lakes Newspapers.

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