Everything you should know about Puerto Rico’s debt crisis

Puerto Rico’s financial crisis has been well-documented over the last few weeks, but a new report in the Washington Post sheds light on how Congress may have played a role in the fiscal troubles being felt in the U.S. commonwealth. Michael Fletcher of the Washington Post joins Hari Sreenivasan from Baltimore with the latest.

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    Now to financial trouble in Puerto Rico, where leaders want to declare bankruptcy, but cannot, unless the U.S. Congress changes the law.

    Puerto Rico announced last month it simply cannot pay $72 billion in debt. Congressional Democrats want to allow limited bankruptcy relief, but Republicans say it's not enough and that leaders need to address the territory's underlying budget issues.

    Ironically, a new report in The Washington Post says Congress has actually played a contributing role in the fiscal trouble of the U.S. commonwealth.

    Joining us now with the details, from Baltimore, is Michael Fletcher, who has been covering the story.

    You were just down there a few weeks ago. So, what's the U.S. responsibility in this crises?


    Well, it's interesting. The political economy has been skewed for years by U.S. taxpayers essentially. In many ways, early on decades ago, that led to a kind of a development of the island as kind of this manufacturing hub, which is a very generous tax break.

    The first ones to clothing and shoe manufactures. Then in 1970s, it kind of shifted to more capital-intensive businesses like pharmaceutical manufacturing. And that made Puerto Rico into one of the top prescription drug manufacturers in the world. At one point, something like 13 of the top 20 prescription drugs are actually made in Puerto Rico.

    And in many ways, that development took away from other things the island might have done naturally, like develop more, its tourism sector or what have you.

    It was fine as long as the tax break lasted, but then in 1996, Congress did away, it began to phase out that tax break, and ti was fully phase out since 2006. And since then, Puerto Rico's been in recession.


    And they can't declare bankruptcy like Detroit can.


    They can't. They're treated just like states are under bankruptcy law, like municipalities and hospital districts, things like that.

    They can — they can declare bankruptcy which gives them breathing room to reorganize their debts, and Puerto Rico cannot do that. For the last nine, 10, 12 years, Puerto Rico has been stuck in the cycle of following more money basically to pay for its ongoing operations.

    Right now, close to half of the budget's goes to debt service and this is just an unsustainable situation. So, now, the island is looking for at least some limited Chapter 9 relief.

    They want to be able to have sort of state-run corporations which on the island provide electricity, they take care of water and sewer and highways, they want the ability for those corporations at least to go to bankruptcy so they could work out something with creditors.

    And really the threat from Puerto Rico is that if there's no Chapter 9 relief, there will be bankruptcy by another name. They'll just default, and creditors will have to sue and this will be a dragged out process that will be no good for creditors and also very bad for the island as well.


    So, there's also this political tension here. The Democratic candidates, even the White House is behind this Chapter 9 possible legislation that's working its way through.

    But then, there's some tension inside the Republican Party on some folks who might be concerned about the votes versus concerned about the hedge fund managers.


    Exactly right. It's kind of tugged two ways. A lot of the creditors, of course, are saying they don't want Puerto Rico to have this bankruptcy option because that's the reason they extended credit.

    They knew that the island couldn't go into bankruptcy and they assume they've offered another layer of protection that the island doesn't have to go that much farther to pay those debts. So, there's that.

    But, also, you look at states like Florida, where you have an increasing Puerto Rican population.

    There's been a flight from Puerto Rico, for all these economic problems, and a lot of people are going to central Florida, others go to New York, of course, or Philadelphia. But that creates this kind of political pressure to do something.

    And I think both Democrats and Republicans feel that. But many Republicans don't like the idea of bankruptcy.

    Some equated to a bailout, which is interesting. I don't see quite how that's a government bailout. But nonetheless they sort of feel the sense that Puerto Rico has to somehow pay this debt.

    But given the way that cycle working, it seems unlikely that they'll be able to do that, barring some unforeseen economic expansion.


    All right. Michael Fletcher of The Washington Post, joining us from Baltimore — thanks so much.


    My pleasure.

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