Puerto Rico Debt Crisis: Everything You Need to Know

PHOTO: The Puerto Rican flag flies in front of Puerto Ricos Capitol as in San Juan, Puerto Rico, July 29, 2015.PlayRicardo Arduengo/AP Photo
WATCH Puerto Rico Misses Debt Payment Deadline

Puerto Rico’s government failed to make a large debt payment today – a default that could intensify the island’s financial crisis.

The U.S. island territory did not pay the nearly $370 million in bond payments that were due.

Instead, Gov. Alejandro Garcia Padilla announced Sunday night that the commonwealth will first focus on making payments for crucial health and public-safety services, while declaring a moratorium on millions of dollars due on bonds issued by the Government Development Bank (GDB), which is the island’s lender of last resort.

"Faced with the inability to meet the demands of our creditors and the needs of our people, I had to make a choice," Garcia Padilla said in a televised address. "I decided that essential services for the 3.5 million American citizens in Puerto Rico came first."

A law enacted by Puerto Rico’s government in April empowers the governor to suspend debt payments to pay for essential services.

Puerto Rico is facing an increasingly dire financial crisis as it tries to deal with a mounting $70 billion pile of debt.

The default this week is considered an ominous sign but most of the focus in on July 1, when the government has to make payments on several general obligation bonds it issued. A failure to make these payments is considered more serious by financial markets than a default on the GDB payments due today.

The issue now is whether Washington will step in to help Puerto Rico before July 1.

Legislation that would allow the commonwealth to restructure its debt is currently bogged down in the House, with some conservatives calling it a government bailout. House Speaker Paul Ryan and other supporters of the legislation say it would not put any taxpayer money at risk.

Both the House and Senate are in recess this week, so further negotiations will have to wait.

White House Press Secretary Josh Earnest said today he hopes Puerto Rico's default will create "a new sense of urgency" for Republican lawmakers who “have been dragging their feet for too long."

He tallied that it's now been 194 days since the Obama administration put forward a legislative proposal for addressing the situation.

"So I think that should be an indication to you and to the people of Puerto Rico that the administration has been focused on this for more than six months,” Earnest told reporters. “And unfortunately we haven't seen the kind of movement in the Republican-led Congress that we need to see to make a bailout of Puerto Rico less likely."

Why does Puerto Rico have so much debt?

The island ended up with so much debt in the aftermath of a recession that began hitting Puerto Rico in 2006. As tax revenues fell, the government borrowed more and more to balance its budget.

Creditors fault the island’s political problems for failing to collect taxes and for allowing the island’s economic problems to go unsolved.

Can this financial crisis turn into a humanitarian crisis?

Puerto Rico’s public services are mainly still functioning but some are concerned about a humanitarian crisis, including the Obama administration. Officials at the U.S. Treasury Department are urging Congress to provide aid in the form of debt relief.

One concern: what happens to local hospitals on the island if they cannot pay their bills? The Centers for Disease Control and Prevention (CDC) expects the island's hospitals to be bombarded with Zika-related cases this summer.

What is Congress going to do?

The chairman of the House Resources Committee has drafted a bill that is intended to address the island’s fiscal crisis.

It would create a financial oversight authority that would approve budgets submitted by Puerto Rico’s governor and subsequently passed by the local legislature. In exchange, Puerto Rico would be allowed to take advantage of court-enforced debt restructuring, similar to the system U.S. states and cities can utilize.

But a group of conservative House Republicans say this amounts to a bailout and they want more controls put in place for the island. Ryan and other GOP leaders argue the bill is not a bailout because no U.S. taxpayer money would be at a stake.

Some Democrats have expressed concerns with how much power the control board would have over Puerto Rico’s government.

A group of hedge funds that hold Puerto Rico bonds is lobbying to derail the House bill under the belief they could get a better deal by suing the government or striking a separate deal with it.

Some critics of allowing Puerto Rico to restructure its debt argue it would change the rules for the investments and possibly undermine market confidence in the island’s bonds.

But in a sign that the House bill may be well received by investors, PIMCO said last week that it supports the legislation, arguing a failure to address Puerto Rico’s debt crisis is a far bigger concern than some of the issues raised with the committee proposal.

"A successful resolution to the unique crisis in Puerto Rico can only be achieved with a strong federal oversight board empowered to both enforce fiscal discipline and adjust the Territory’s public debt in a fair and equitable manner designed to achieve debt sustainability," the company said in a blog post endorsing the House bill.