How Puerto Rico Got So Deep in the Red

When Puerto Rico’s governor told lawmakers and citizens on Monday that the commonwealth could not pay its $72 billion in debt, many wondered how a small, seemingly low-key American island in the Caribbean could have amassed a debt big enough to crush it.

 

The answer lies in a confluence of factors, including American investors’ desire to avoid taxes; the mutual fund industry’s practice of competing on the basis of yield; complacency about the practice of long-term borrowing to plug holes in budgets; and laws that supposedly give bond buyers ironclad guarantees.

That brew of incentives has produced truly staggering numbers. On a per-capita basis, Puerto Rico has more than 15 times the median bond debt of the 50 states, according to Moody’s Investors Service. The governor, Alejandro García Padilla, said on Monday that at the rate the debt situation is developing, every man, woman and child on the island would owe creditors $40,000 by 2025. High unemployment means fewer resources to pay off what is owed.

“We cannot allow the heavy weight of the debt to bring us to our knees,” the governor said in a live televised address, proposing a debt restructuring.