MIAMI, Florida — On Tuesday, a federal judge approved Puerto Rico’s exit from bankruptcy under the largest public-sector debt restructuring plan in US history, nearly five years after the financially beleaguered territory claimed it couldn’t pay its creditors.
Hurricanes Irma and Maria, a series of earthquakes, and the coronavirus epidemic have only exacerbated Puerto Rico’s economic woes since it declared bankruptcy.
The restructuring proposal will cut the government of Puerto Rico’s debt, which totals $33 billion, by nearly 80%, to $7.4 billion. In addition, the agreement will save the government approximately $50 billion in debt payments.
Puerto Rico will also begin repaying creditors, albeit at a reduced rate, something it has not done in years. In 2015, the government announced that it would be unable to repay its debts.
Is Puerto Rico owed money by the United States?
After a federal judge accepted a restructuring plan that would cut the majority of Puerto Rico’s $70 billion public debt, the U.S. island is one step closer to ending its nearly five-year bankruptcy battle.
The debt restructuring deal adopted Tuesday will reduce annual repayments to bondholders who control Puerto Rico’s debt from $33 billion to around $7 billion.
What is the size of Puerto Rico’s debt?
SAN JUAN, PRINCIPALITY OF PUERTO RICO — Puerto Rico’s nearly five-year bankruptcy struggle has come to an end as a federal judge signed a deal on Tuesday that reduces the US territory’s public debt load as part of a restructuring and allows the government to begin repaying creditors.
The deal, which is the largest municipal debt restructuring in US history, was authorized after arduous bargaining, contentious hearings, and numerous delays while the island recovers from fatal hurricanes, earthquakes, and a pandemic that exacerbated its economic plight.
“There has never been a public restructuring like this anyplace in America or the world,” David Skeel, chairman of a federal control board formed to monitor Puerto Rico’s finances, said of the plan.
He pointed out that there are no bankruptcy provisions for countries or US states like the one handed to Puerto Rico.
“This was an astoundingly difficult, huge, and important bankruptcy,” Skeel said, noting that the island’s debt was three times that of Detroit.
The government of Puerto Rico claimed in 2015 that it could not afford to pay its $70 billion public debt, which had accrued over decades of mismanagement, corruption, and excessive borrowing. In addition, it owed more than $50 billion in public pension obligations. A year after the United States Congress established the financial monitoring and management board for Puerto Rico, it filed for the largest municipal bankruptcy in US history in 2017.
What is the state of Puerto Rico’s economy?
The World Bank classifies Puerto Rico’s economy as a high-income country, while the World Economic Forum ranks it as Latin America’s most competitive economy. Manufacturing, particularly pharmaceuticals, textiles, petrochemicals, and electronics, are the main drivers of Puerto Rico’s economy, followed by the service industry, particularly finance, insurance, real estate, and tourism. Puerto Rico’s geography and political status are both determining factors in its economic prosperity, owing to its small size as an island; its lack of natural resources used to produce raw materials, and thus its reliance on imports; and its relationship with the US federal government, which controls its foreign policies while imposing trade restrictions, particularly in the shipping industry.
On a macroeconomic level, Puerto Rico has been in a state of economic depression for 16 years, beginning in 2006 after a series of negative cash flows and the expiration of the US Internal Revenue Code’s section 936, which applied to Puerto Rico. This section was critical for the island’s economy because it established tax exemptions for U.S. corporations that settled in Puerto Rico and allowed its subsidiaries operating on the island to send earnings to the parent corporation at any time without having to pay federal tax on corporate income. Puerto Rico, on the other hand, has remarkably managed to keep inflation low during the last decade. Academically, the majority of Puerto Rico’s economic woes stem from federal regulations that have expired, been repealed, or no longer apply to the island; its inability to become self-sufficient and self-sustaining throughout history; its highly politicized public policy, which tends to change whenever a political party gains power; and its highly inefficient local government, which has amassed a public debt equal to 66 percent of its gross domestic product.
Puerto Rico has a lower poverty rate than the poorest state in the US, with 45 percent of the population living below the poverty line. When compared to the rest of Latin America, Puerto Rico has the highest GDP per capita. The Commonwealth has a tremendous bond debt that it can’t service, totaling $70 billion in early 2017, or $12,000 per capita, at a time when its unemployment rate (8.0 percent in October 2018) is more than double that of the mainland. During a decade-long recession, the debt had been rising. To avoid a bankruptcy-like procedure under PROMESA, Puerto Rico must establish restructuring agreements with creditors. More specifically, since 2016, Puerto Rico has been in an unusual situation: its economy has been overseen by a federal board that is handling finances and assisting in regaining access to capital markets.
The commonwealth has a modern infrastructure, a significant public sector, and an institutional framework governed by the regulations of US federal agencies, the majority of which are present and operating on the island. The United States, Ireland, and Japan are its key commercial partners, with the majority of its products coming from East Asia, primarily China, Hong Kong, and Taiwan. In 2016, new trading partners were added, with import trade with Puerto Rico beginning in Singapore, Switzerland, and South Korea. Puerto Rico’s global reliance on oil for transportation and electrical generation, as well as its reliance on food imports and raw materials, renders the island fragile and highly reactive to global economic and climate changes.
What was Spain’s motivation for wanting Puerto Rico?
In the 16th century, the Spanish began bringing additional slaves from Africa in order to produce cash crops like as sugar cane, ginger, tobacco, and coffee. They also spent a lot of money to turn San Juan into a fortified military outpost, constructing a fortified governor’s palace (La Fortaleza) and two massive forts (San Felipe del Morro and San Cristobál) that could withstand repeated attacks from rival powers like England, the Netherlands, and France.
Puerto Rico has different degrees of economic and political autonomy under Spanish colonial control over the centuries. However, by the mid-nineteenth century, a wave of independence movements had spread throughout Spain’s South American territories, including Puerto Rico.
Is it true that Puerto Rico has voted for independence?
The Puerto Rican independence movement refers to efforts by residents throughout the island’s history to gain full political independence, first from the Spanish Empire from 1493 to 1898, and then from the United States since 1898. Over the years, a number of groups, movements, political parties, and organizations have fought for Puerto Rico’s independence.
On the island, there are a variety of pro-autonomy, pro-nationalism, and pro-independence views and political groups. Organizations fighting for independence in Puerto Rico have tried both peaceful political measures and violent revolutionary activities to attain their goals since the early nineteenth century. The independence movement has not received widespread support from the Puerto Rican public since the second half of the twentieth century, failing to gain traction in both plebiscites and elections. In a 2012 referendum on the status of the country, 5.5 percent voted for independence, while 61.1 percent opted for statehood. In the status referendums in 1967, 1993, and 1998, independence garnered the least support, with less than 4.5 percent of the vote.
In 2012, a fourth referendum was held, with 54 percent of voters choosing to change Puerto Rico’s status, but the federal government did nothing. On June 11, 2017, the fifth plebiscite was held. It had the lowest voter turnout of any status referendum held in Puerto Rico, with only 23% of eligible voters voting. In the referendum, the option of independence won only 1.5 percent of the vote.
The Puerto Rican Independence Party won 13.6 percent of the vote in the 2020 general election, a considerable gain in support from the 2016 general election, when it received only 2.1 percent of the vote. In the 2020 elections, the anti-colonial Movimiento Victoria Ciudadana received an additional 14 percent of the vote.
Is Puerto Rico a government-run welfare state?
In Puerto Rico, public welfare is a system that provides food assistance, public health, education, and subsidized public housing, among other things, to the island’s poor.
What city in the United States has the largest Puerto Rican population?
New York is the city with the greatest number of Puerto Ricans, followed by Chicago, Philadelphia, Newark, and Hartford. New York, which has around 890,000 Puerto Ricans and still outnumbers all other cities by a huge margin, did not see a major increase in the number of Puerto Ricans living there during the 1980s.
Is Puerto Rico a tax haven?
Puerto Rico is a U.S. unincorporated territory, and Puerto Ricans are citizens of the United States; nevertheless, Puerto Rico is not a state, but rather a U.S. insular area. As a result, while all citizens of Puerto Rico pay federal taxes, many are exempt from paying federal income taxes. Customs taxes, federal commodity taxes, and federal payroll taxes are all examples of federal taxes in the United States (Social Security, Medicare, and Unemployment taxes).
Employees and businesses in Puerto Rico are not required to pay federal income taxes. Only federal government employees in Puerto Rico, residents who are members of the United States military, those with income sources outside of Puerto Rico, individuals or corporations who do business with the federal government, and Puerto Rico-based corporations intending to send funds to the United States are required by federal law to pay federal income tax.
What is Puerto Rico’s most important industry?
The services sector, which encompasses trade, tourism, banking, and government work, has fast risen to become Puerto Rico’s most important business. The services sector contributes for over half of Puerto Rico’s GDP and employs up to 75% of the island’s total workforce.
Is Puerto Rico’s poverty level higher than Mississippi’s?
According to new data released today by the US Census Bureau, Puerto Rico’s poverty rate has reached 44.9 percent, nearly double the poverty rate in Mississippi, the poorest of the fifty states. It’s the latest in a spate of poor news for the self-governing US territory’s economy.
The history of Puerto Rico is similar to that of many unstable European countries. It’s been in a slump since 2006, even longer than Greece. Because it uses the US dollar, it, like many other euro zone countries, is unable to inflate its way out of its troubles.