All eyes were on Detroit earlier this month as Federal Judge Steven Rhodes ruled that the city could discharge public pensions, along with other debt, as it restructures under Chapter 9 bankruptcy.
While other cities look at the ruling as a viable—though unfortunate—solution for their financial woes, there is one especially troubled economy that will not be able to take advantage of the ruling, or file for bankruptcy at all: Puerto Rico.
Last Wednesday, Moody’s Investors Service announced that it may downgrade Puerto Rico’s general-obligation debt to “junk” (noninvestment) status. All three credit rating agencies currently have the island at just above junk status, but with “weakening liquidity, increasing reliance on external short-term debt, and constrained market access, within the context of a weakened and now sluggish economy,” a downgrade seems increasingly likely.
Puerto Rico’s high debt is exacerbated by its pension obligations—25 percent of all workers were employed by the Puerto Rican government before former Governor Luis Fortuño cut more than 40,000 jobs during his tenure—as well as budget deficits that predate the Great Recession and the prolonged deterioration of the island’s economy.
Now entering its eighth straight year of recession, Puerto Rico has found it difficult to recover as U.S. federal funding has dried up, energy prices have skyrocketed and tens of thousands of Puerto Ricans have fled the island looking for better opportunities on the mainland. Although Detroit’s debt pales in comparison to Puerto Rico’s—as of 2013, the island’s debt is nearly four times larger than Detroit’s –as a commonwealth, Puerto Rico is ineligible for bankruptcy.
That a U.S. territory whose debt load, as reported by the AFP, accounts for 93 percent of its GDP and has more than double the unemployment rate of the mainland cannot discharge its debt seems counterintuitive at best, and irresponsible at worst.
While current Governor Alejandro García Padilla has emphasized that it is a constitutional—and for him, a moral—obligation for Puerto Rico to pay its debts, and the White House has assembled its own economic advisory team for the territory, there are few options available to the island. A wary federal government that can’t seem to keep its own lights on without a partisan meltdown is unlikely to come to the island’s rescue, and as a U.S. territory, Puerto Rico cannot control its own monetary policy, which leaves just one option: default.
Because Puerto Rico is in legal limbo due to its status, there’s no telling what a default, or the threat of one, would actually entail. What Puerto Rico needs is a complete restructuring of its economy, which now relies primarily on the bond market, the public sector and tourism—and has consistently lost industry since federal corporate tax rates expired in 2006.
With the constraints of its commonwealth status, a dwindling population, a low credit rating, and high unemployment rates, however, Puerto Rico’s flexibility to implement creative approaches to building a stronger economy is practically nonexistent.