Puerto Rico’s current debt, between $52 billion and $70 billion, is the third-largest behind California’s and New York’s, despite a far smaller and poorer population, according to an analysis in the recent edition of The Economist. In America’s 50 states the average ratio of state debt to personal income is 3.4 percent. Moody’s, a ratings agency, puts Puerto Rico’s tax-supported debt at an astounding 89 percent. Puerto Rico’s debt has long been a staple of American municipal-bond funds because of its high yields and its exemption from federal and local taxes—of particular appeal to investors in high-tax states, according to the analysis. That let Puerto Rico keep borrowing despite its shaky economic and financial condition, until Detroit’s bankruptcy in July alerted investors to the threat of default by other governments. Puerto Ricans have American citizenship and receive American government pensions, but pay no federal tax on their local income. The economy has big structural problems as participation in the labor force, at 41 percent, is nearly 20 percentage points below America’s. Should Puerto Rico seek to restructure its debts, it would be entering uncharted legal terrain, according to the analysis. Unlike a city it cannot declare bankruptcy and it does not enjoy the same sovereignty the constitution grants the states; should it try to default on its debts, Congress might intervene, and years of litigation would likely follow.
