Puerto Rico Collapses into Bankruptcy

Published June 7, 2017

The government of Puerto Rico, a territory of the United States in the Caribbean Sea, began negotiating with bondholders in federal court to discharge approximately $123 billion in public debt and unfunded pension liabilities, after the commonwealth filed for bankruptcy on May 3.

The first bankruptcy hearing was held in San Juan on May 17, supervised by federal District Court Judge Laura Taylor Swain, as bondholders, lawmakers, and investors met to begin the process.

The territory, governed by Ricard Rossello (New Progressive Party), is self-governed but ultimately subject to the authority of the U.S. government.

Puerto Rico’s move is the largest government bankruptcy filing in U.S. history, surpassing Detroit, Michigan’s July 2013 bankruptcy, which involved an $18 billion debt load.

Wake-Up Call

Joseph Milligan, executive vice president of Fundación Libertad, a nonpartisan think tank in Puerto Rico, says the territory’s collapse will help people realize the urgency of enacting pro-growth economic policies there.

“Regarding the bankruptcy and the fiscal situation, there are no winners in these situations,” Milligan said. “However, it does help us to understand that we are on an unsustainable path. Once we get to the end of that road and we realize that we have to go in a different direction, hopefully that will lead to a much brighter and prosperous future—only if we learn the lessons of what got us here in the first place.”

‘Toxic’ Policy Environment

Puerto Rican lawmakers’ refusal to enact free-market policies caused the government’s collapse, Milligan says.

“This fiscal crisis and this bankruptcy had a bit to do with the economic depression, and the economic depression had to do with the business environment in Puerto Rico,” Milligan said. “It is a policy and bureaucratic environment that is toxic to doing business.”

Lesson for Other Governments

Jonathan Williams, chief economist and vice president of the American Legislative Exchange Council’s Center for State Fiscal Reform, says what’s happening in Puerto Rico can happen on the mainland, too.

“First of all, while this is a very painful experience to go through for Puerto Rico, it should be a warning sign for many other state and local governments across the United States of what uncontrolled debt spending and pension muddying can be if not treated immediately, capped, and reformed,” Williams said. “This is going to be very painful for the taxpayers of Puerto Rico and for the creditors, in some cases.

“This should be a positive for other governments, to say, ‘We don’t want to be Puerto Rico.'” Williams said. “Hopefully, other state and local governments won’t repeat the same thing.”