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Puerto Rico Unable to Pay Its Debts

  • Jim Randle

FILE - A man looks at the screen of an ATM of the failed Doral Bank in San Juan, Puerto Rico, February 27, 2015.

FILE - A man looks at the screen of an ATM of the failed Doral Bank in San Juan, Puerto Rico, February 27, 2015.

The U.S. Commonwealth of Puerto Rico cannot pay around $72 billion in debts, according to news reports in the New York Times and other media.

A message from Governor Alejandro Garcia Padilla says the commonwealth must make “difficult decisions” to cope with a long-simmering financial situation that is worse than first thought.

The message follows a detailed examination of the island’s finances by former high-ranking officials from the World Bank and the International Monetary Fund. They urged changes intended to boost economic growth, including reforms to labor laws, and cutting the cost of electricity and transportation. The study also called for higher taxes and lower pensions to put government finances on a sustainable path.

News reports say the island has more municipal bond debt per capita than any American state. Much of the island's debt is held by individual U.S. investors in mutual funds or other investment accounts.

About 3.6 million people live on Puerto Rico, which is a territory called a “commonwealth” of the United States, but is not a state.

Financial expert Rodney Johnson says U.S. law does not provide for a Commonwealth to go through a bankruptcy to manage and restructure its debts. Efforts to change that law have not been successful.

Johnson, the co-editor of “Boom and Bust” as well as “Economy and Markets,” says Puerto Rico has no choice but to create a legal pathway that restructures debt and that will be bankruptcy in “everything but name.” In a Skype interview, he says Puerto Rico could be a “road map” for some financially-troubled U.S. states that have billions more dollars in debt than in assets.

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