The island territory is involved in one of the biggest bankruptcies in US history, owing to a decade-long recession and $70bn (£50bn) of debt.
On 3 May 2017, Puerto Rico made history by declaring bankruptcy. The previous year, then president Barack Obama had to sign a ‘rescue law’, the Puerto Rico Oversight, Management, and Economic Stability Act, to allow it to do so.
The bankruptcy filing is the largest in the history of the US public bond market: the territory was more than $70bn (£50bn) in debt. And a decade-long recession has left almost 45% of Puerto Rico’s population living in poverty, with unemployment currently standing at 10.1%.
How the troubles began
The roots of Puerto Rico’s woes lie in its tax status, which, as a US territory, it has no control over. The US government’s intentions were good – in an attempt to modernise Puerto Rico’s economy, it created a tax break in 1976 that meant US manufacturers could avoid various tax obligations by basing themselves on the island.
Large corporations came flocking to Puerto Rico, and its economy flourished. But this left the mainland with a massive tax deficit in the 1980s, which continued until it was decided in 1996 to phase out the tax break over ten years.
A decade later…
The manufacturers that had formed the backbone of Puerto Rico’s economy for 30 years had all gone. There was little on the island to replace them. With jobs gone, young Puerto Ricans left the island in droves.
To make matters worse, the territory had (and has) a booming underground economy, with everything from retail, basic manufacturing and even doctor’s offices running on a cash-only, off-the-books basis.
Unable to collect the tax it needed from its citizens, the Puerto Rican government had no choice but to borrow money to keep afloat.
What does the future look like?
Having no way to change its own tax laws – it has one representative in Congress, without a vote – Puerto Rico had to make appeals to the mainland for help, which largely fell on deaf ears until Obama enabled it to file for bankruptcy.
While the case goes through the courts, things have gone from bad to worse: Hurricane Maria devastated the island, forcing the bankruptcy hearing to move to New York City. President Donald Trump, meanwhile, has been criticised for being unsympathetic to Puerto Rico’s plight, blaming its government for its inability to deal with the damage caused by the hurricane.
Perhaps bankruptcy will put an end to the most pressing of Puerto Rico’s difficulties but, without the full support of the US government, it won’t be able to completely resolve its problems.
This article first appeared in Summer issue of 20 magazine.
Mark Rowland is the Editor of Accounting Technician and 20 magazine.