The Puerto Rican government-debt crisis was a financial crisis affecting the government of Puerto Rico. The crisis began in 2014 when three major credit agencies downgraded several bond issues by Puerto Rico to "junk status" after the government was unable to demonstrate that it could pay its debt. The downgrading, in turn, prevented the government from selling more bonds in the open market. Unable to obtain the funding to cover its budget imbalance, the government began using its savings to pay its debt while warning that those savings would eventually be exhausted. To prevent such a scenario, the United States Congress enacted a law known as PROMESA, which appointed an oversight board with ultimate control over the Commonwealth's budget. As the PROMESA board began to exert that control, the Puerto Rican government sought to increase revenues and reduce its expenses by increasing taxes while curtailing public services and reducing government pensions. These measures provoked social distrust and unrest, further compounding the crisis. In August 2018, a debt investigation report of the Financial Oversight and management board for Puerto Rico reported the Commonwealth had $74 billion in bond debt and $49 billion in unfunded pension liabilities as of May 2017. Puerto Rico officially exited bankruptcy on March 15, 2022.
Background
Puerto Rico is a territory of the United States, acquired in 1898 through the Spanish–American War. Unlike U.S. states it has no sovereignty, and all of its powers are delegated from the United States Congress under the Territorial Clause of the federal constitution. It has had an elected governor since 1948, and elected legislature since 1900.
The federal Jones–Shafroth Act of 1917, exempts interest payments from bonds issued by the government of Puerto Rico and its subdivisions from federal, state, and local income taxes (so-called "triple tax exemption") regardless of where the bondholder resided. This right made Puerto Rican bonds attractive to municipal bond investors. This factor led Puerto Rico to issue bonds that were always attractive to municipal investors, regardless of Puerto Rico's account balances. Puerto Rico thus began to issue debt to fund its expenses, a practice repeated for four decades since 1973. The island also began to issue debt to repay older debt, as well as refinancing older debt possessing low-interest rates with debt possessing higher interest rates.
In 1984, Congress explicitly forbade Puerto Rico from declaring bankruptcy under Chapter 9, Title 11, United States Code. Between 1996 and 2006, Congress eliminated the tax credits, contributing to the loss of 80,000 jobs on the island and causing its population to shrink and its economy to contract in all but one year since the Great Recession. Because the Constitution of Puerto Rico established that "all available resources" must first go towards payment of the Commonwealth's general obligation bonds, in 2006, the Commonwealth began issuing Puerto Rico Sales Tax Revenue Bonds, to avoid its constitution's limits by being paid directly into a separate urgent interest fund. Sales tax was increased to 11%. The last property tax assessment was done in 1958. It was not until Puerto Rico enlarged its outstanding debt to $71 billion—an amount approximately equal to 68% of Puerto Rico's gross domestic product (GDP)—that Puerto Rican bonds were downgraded to non-investment grade (better known as "junk status" or speculative-grade) by three bond credit rating agencies between February 4 and 11, 2014. This downgrade triggered bond acceleration clauses that required Puerto Rico to repay certain debt instruments within months rather than years. Investors were concerned that Puerto Rico would eventually default on its debt. Such a default would reduce Puerto Rico's ability to issue bonds in the future. Puerto Rico currently states that it is unable to maintain its current operations unless it takes drastic measures that may lead to civil unrest. There have already been protests over the austerity measures. These events, along with a series of governmental financial deficits and a recession, contributed to Puerto Rico's debt crisis.