Puerto Rico, a U.S. territory, filed for the equivalent of bankruptcy to relieve $74 billion dollars in debts to local and U.S. based creditors, as well as $49 billion in pension obligations. The appointed oversight board stated in a court filing that Puerto Rico is “unable to provide its citizens effective services.” As this unfolds, it is certain to have many far-reaching effects across the continental United States.
Part of the reason for Puerto Rico’s economic downfall is the recent 10% reduction in population. With these current financial problems, exodus from the island is expected to continue to the mainland United States. Sources indicate that one million native Puerto Ricans now live in Florida.
The following is one example of the expected effects of this filing. Puerto Rico’s bonds have been tax exempt for 100 years, thus attracting many investors and mutual funds. However, now these funds may collapse and lose billions of dollars in value thus affecting countless public sector retirees and employees from the states that invested in them.
Also, any default by Puerto Rico on any loan obligation may cause some investment companies with a substantial investment in Puerto Rico to collapse if not repaid, thus causing a scenario similar to the subprime mortgage crisis of ten years ago. All of the business entities with the highest levels of exposure to risk from Puerto Rico’s action are expected to contest the filing with all available resources.
Another U.S. territory, the U.S. Virgin Islands, with a population of just over 100,000, has a debt of $2 billion dollars. It’s certain that the territory will monitor the process and the results in Puerto Rico’s case to determine the viability of Congressional action. Also, states with high debt and/or pension obligations are also expected to closely monitor Puerto Rico’s “filing” under Title III.
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