Economic Crisis Looms For Puerto Rico, Report Says

Jun 29, 2015
Originally published on June 28, 2016 9:43 am

A report obtained by NPR paints a bleak portrait of Puerto Rico's economic future, saying its deficit is much larger than previously thought.

"Puerto Rico faces hard times," says the report which was commissioned by the Government Development Bank and written by three former and current International Monetary Fund economists. It is to be released on Monday.

"Structural problems, economic shocks and weak public finances have yielded a decade of stagnation, outmigration and debt. Financial markets once looked past these realities but have since cut off the commonwealth from normal market access. A crisis looms," it says.

Following the report's release, Governor Alejandro Garcia Padilla is preparing to give a major speech, in which he's expected to say Puerto Rico can no longer afford to pay off its $73 billion in debt on time.

"The debt is not payable," Gov. Alejandro Garcia Padilla told The New York Times. "There is no other option. I would love to have an easier option. This is not politics, this is math." He also said he will ask its creditors for more time to pay off what it owes.

The island has borrowed heavily over the years, issuing bonds to pay for pensions and government services, even as its economy shrunk and its population grew smaller.

Its debt load is now by far larger per capita than any of the 50 states. Its bonds were considered attractive because Congress allowed them to be issued free of federal, state and local taxes.

"The economy is in a vicious cycle, where unsustainable public finances are feeding into uncertainty and low growth, which in turn is raising the fiscal deficit and the debt ratio," the report says.

It adds the government needs far-reaching economic reforms, but even so will have trouble paying its debts in the years to come.

On Wednesday, the Puerto Rico Electric Power Authority is due to make a $400 million payment to condholders, money it reportedly does not have.

The interview by Garcia Padilla, coupled with the troubles in Greece, could lead to a tumultuous day in the bond markets on Monday.

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As we report on the debt crisis that is crippling Greece's economy, there's a similar crisis closer to home. Puerto Rico has amassed a huge amount of public debt in recent years, nearly $73 billion. Now a report obtained by NPR says that even with major economic reforms, Puerto Rico will have trouble paying off that debt. The governor of that U.S. territory says he will ask creditors for more time. NPR's Jim Zarroli has been following this and is on the line now. Good morning.

JIM ZARROLI, BYLINE: Good morning.

MONTAGNE: So this report that NPR has obtained was commissioned by the agency that manages Puerto Rico's debt. What are some of the conclusions?

ZARROLI: Well, it's really a dire report. I mean, this is a crisis looming. This was written by three current and former economists at the International Monetary Fund, and they say, quote, "the economy is in a kind of vicious circle where unsustainable public finances are feeding into uncertainty and low growth, which is making the fiscal problems worse." In other words, the economy has been shrinking for years, so tax revenue has fallen. That makes it harder to pay off debt, and that just weakens the economy even more.

MONTAGNE: And of course, as I said, Puerto Rico's a territory of the U.S. Puerto Ricans are American citizens.

ZARROLI: That's right, yes.



MONTAGNE: How did Puerto Rico get into this deep hole?

ZARROLI: It has deep structural problems. It has high labor costs, high shipping costs. Electricity is expensive. It has tried to attract businesses by cutting taxes, but that has just made the fiscal problems worse. Now, for a long time, Puerto Rico has been able to paper over this by borrowing a lot. Its bonds were very attractive to investors because Congress allowed them to be issued free of state and federal and local taxes. So the debt load grew in good times; it grew in bad times. And today, this report says it is much worse than anyone thought. The government has tried to address this by cutting costs, raising taxes, but it just hasn't been enough.

MONTAGNE: Is it likely to affect the larger U.S. economy?

ZARROLI: That remains to be seen. I mean, I think what you can say for sure is that there are investors - institutional investors and individuals - who will be affected. Like I say, a lot of people invested in Puerto Rican bonds. They're going to take a big hit now. There's going to have to be a process by which the debts are worked out in court.

MONTAGNE: And - but does this mean that Puerto Rico is now bankrupt?

ZARROLI: Well, Puerto Rico is not allowed to declare bankruptcy by law. It wanted Congress to change the law to allow it to go bankrupt, but Congress didn't want to do that, so Puerto Rico will almost certainly be in default. And as I said, all those people are going to take a hit. You know, it's - we're going to see this process where the commonwealth and its creditors try to figure out who gets what. There's a lot at stake here. You know, when Detroit went bankrupt, it had about $20 billion in debt. Well, Puerto Rico has at least $72 billion and probably more.

MONTAGNE: Wow. Well, just briefly, the governor of Puerto Rico is supposed to give a speech today about the economy. What's he likely to say?

ZARROLI: He is likely to say that time has run out, that Puerto Rico can't pay what it owes. It needs more time to make good on its debts. He gave an interview to The New York Times in which he basically said, you know, the debt is not payable. He said there's no other option. This is not politics. This is math. I mean, it's sort of a warning to the island's creditors to get ready to take a loss. He is also going to give a speech to the people of Puerto Rico...


ZARROLI: ...and the legislators today, so that will be what he says.

MONTAGNE: OK, well, thanks very much.

ZARROLI: You're welcome.

MONTAGNE: NPR's Jim Zarroli. Transcript provided by NPR, Copyright NPR.