Who Will Decide the Fate of Puerto Rico’s Debt Crisis?

By Jacqueline Aleman

Puerto Rico and its state-owned agencies have amassed an estimated $70 billion of debt since 2006. That’s four times the debt that forced Detroit into bankruptcy two years ago. A bad combination of rising debt, slow economy, and decreasing population has pushed yields on Puerto Rico debt above those of Greece. The securities have been trading at distressed levels for nearly two years as investors doubted the commonwealth’s ability to repay its debt on time and in full. Puerto Rico warned in its latest quarterly filing that it may place a moratorium on debt payments in fiscal year 2016 if the government can’t cut spending or raise enough revenue to pay back the debt.

For 25 years, Puerto Rico has been caught in a devastating economic spiral. Decades of recession and slow economic growth forced a succession of governments to take out loans to cover budget deficits. With a junk status rating, Puerto Rico is trying to negotiate a new bond sale with Wall Street investors.

To attempt to deal with its debt, Puerto Rico has passed a law that would allow troubled agencies to seek bankruptcy protection. However, a federal judge struck down the law, ruling it violated the federal Bankruptcy Code. Puerto Rico is currently in the process of appealing that decision while also pushing for a law in Congress to amend the Bankruptcy Code to include Puerto Rico.

In the meantime, the island is raising taxes in order to find money to pay its creditors. However, the reality is that this could end up unfruitful. Tax evasion on the island is extensive. A recent study reported that Puerto Rico collects just 56 percent of the sales tax that are due.

In a further attempt to combat tax evasion, Puerto Rico recently passed a law requiring merchants to accept other forms of payment in addition to cash. The Padilla administration also wants to implement a value-added tax, a consumption tax that would be more difficult to evade.

Despite these efforts, many are skeptical about raising taxes to pay down the debt. Puerto Rico’s House recently voted down Padilla’s tax plan. San Juan Sen. Ramon Luis Nieves says he believes in the end, the commonwealth may simply be unable to pay its $70 billion debt in full. However, without enough money to pay its debts and with bankruptcy not being an option, it may ultimately be the bondholders on Wall Street who will decide the island’s future.