Puerto Rico Declares Moratorium On Debt Payment

IAS Prelims 2023

Puerto Rico’s declared a moratorium on a $422 million debt payment due by the island’s Government Development Bank (GDB).

Governor Alejandro Garcia Padilla signed the moratorium in what he characterized as a “painful decision” based on inaction from the U.S. Congress, which continues to debate a legislative fix for Puerto Rico’s $70 billion debt load.

Puerto Rico, a tropical paradise in economic purgatory, faces a $70 billion debt bill it knows it cannot pay, a staggering 45% poverty rate and a shrinking population as citizens flee to the mainland.

The legality of this move to invoke the moratorium, which effectively means defaulting on the debt, is almost certain to be challenged by the GDB’s creditors, and could spawn costly lawsuits and perpetuate more economic uncertainty for the island.

Though island agencies have defaulted in the past, they have been small and isolated. The failure to pay by the GDB could reverberate through the local economy as it serves as Puerto Rico’s primary fiscal agent.

Background of the Crisis:

Puerto Rico’s in trouble. The island’s got $72 billion in debt that its governor says is “not payable.”

The US government used to give major tax breaks to corporations operating in Puerto Rico, which drove a lot of business to the island. But in 2006, Congress let those tax breaks expire.

And then Puerto Rico’s economy went into a recession. People started leaving the island, which meant fewer people were paying taxes.

Lower tax revenue meant Puerto Rico had to cut back on public services, and hike tax rates. Puerto Rico is still in a recession.

Where did all the Debt come from?

Puerto Rico has been able to borrow money without a lot of raised eyebrows thanks to — once again — a US tax break. Unlike US states, Congress lets Puerto Rico issue debt that’s tax free. This made the island’s debt really attractive to investors, who lent their money for way longer than they might have otherwise.