For the first time in its history, the Commonwealth of Puerto Rico failed to pay $58 million of a debt that amounts to $483 million that was due on August 3. The $58 million is mostly owned by ordinary Puerto Ricans through savings and credit unions, which bought government bonds from Puerto Rico's Public Financing Corporation (Corporación para el Financiamiento Público).
The government chose to default on this debt for strategic reasons. The people who own the debt (mostly ordinary Puerto Ricans) do not have the legal power to fight in court, like Puerto Rico's external creditors do.
Is Puerto Rico the Greece of the Caribbean?
Puerto Rico and Greece have been highly discussed topics recently all over the world. Comparisons between the two have been made for at least the past two years (see this previous Global Voices post from 2012, titled “Puerto Rico: The New Greece?“). However, Puerto Rico's situation could very well be vastly more complicated—and even more painful—than Greece's.
If having a debt of over $72 billion—which Puerto Rico must pay before all other considerations, according to its Constitution—isn't a big enough problem in itself, the situation becomes even more problematic when considering that Puerto Rico has no legal framework to restructure its debt.
A law passed last year by the Puerto Rican Legislature that would have allowed public corporations to declare bankruptcy, but US federal courts declared it unconstitutional several weeks later. The courts argued that only the federal government could legislate on issues related to bankruptcy—a somewhat perverse argument, given the fact that Puerto Rico was excluded from being able to file for bankruptcy under Chapter 9 of the Internal Revenue Code. The result is that Puerto Rico cannot avail itself of federal laws to restructure its debt, but neither can it create its own laws.
The only remaining option, it seems, is to persuade Congress to enact legislation that would provide the appropriate legal framework. As Sergio Marxuach of the Center for a New Economy wrote recently:
What Puerto Rico does not need right now is more austerity, because the capacity to repay its debt ultimately depends on restoring economic growth. At the same time, there can be no economic recovery without debt sustainability and that, in turn, is not possible without significantly restructuring at least some of its debt.
Luis Gallardo Rivera, writing for the digital magazine La Respuesta, explains an interesting though unlikely alternative that the government could use to alleviate the situation significantly:
The founders of Puerto Rico’s Constitution, on the other hand, worked into its Article 6, Section 2 a prohibition against spending more than 15% of revenue on public debt. Said Article states that debt payments must be made before any other public expenditures. Though the Puerto Rican government has traditionally applied this priority to all of Puerto Rico’s debt, only $14.7 billion of it is backed up by this constitutional clause. Analysts and politicians alike have referred to this difference as the island's “extra-constitutional” debt. Some […] consider the extra-constitutional nature of the public debt to be illegal and thus null. […] Despite this, it is unlikely that the government will assume this stance.
The US Congress has all but refused outright to help alleviate the crisis. Prior to this, the White House stated that it, too, would keep its distance by not intervening directly in Puerto Rico's fiscal problems (read: no bailout). Nonetheless, president Obama has said publicly that Congress should act, in order to provide Puerto Rico with the necessary legal framework to restructure its debt, joining many other influential voices that have called for similar action from Congress, ranging from presidential hopeful Hillary Clinton to the editors at the New York Times. Whether or not Congress heeds their advice remains to be seen.