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Puerto Rico: The Other Debt Crisis

A woman walks in front of a closed bank in the neighborhood of Rio Piedras in San Juan, Puerto Rico, June 29, 2015.

While Greece has center stage in the arena of on-the-brink finance, the precarious situation in the U.S. territory of Puerto Rico may actually take a greater toll on the American economy.

Last month, Puerto Rico’s governor, Alejandro Garcia Padilla, announced that the island’s public debt of $72 billion was not payable. This includes debts owed not just by the central government, but also those of public corporations, like utility companies, and cities.

An archipelago of islands that lie off the tip of the Dominican Republic in the Caribbean, Puerto Rico is the third-largest issuer of state and local debt in the United States, behind California and New York.

Much of the island's debt is held by individual U.S. investors in hedge funds, mutual funds or other investment accounts, raising questions about how the U.S. economy might be affected were Puerto Rico to fall behind on its debt payments. That could happen as early as mid-July, which raises the possibility that investors might sue for their funds.

Chronic economic woes

Yet, Puerto Rico’s plight is lost among the reports of the economic crisis in Greece. In part, this is because economic troubles in Puerto Rico are not new.

The territory's economy has been in recession since 2005, when the U.S. Congress ended a tax credit designed to attract businesses to Puerto Rico. Since then, the territory has borrowed to stay afloat.

“Puerto Rico’s illness is a chronic condition.” Puerto Rican congressional representative Pedro Pierluishi wrote Friday in The New York Times. “The unemployment rate, poverty rate and median household income have always been far worse than any state’s. The main cause is inequality.”

Pierluishi was making the case that Puerto Rico’s status as a territory, rather than a state, has led to second-class treatment. Residents of Puerto Rico cannot vote for the president or senators, and Pierluishi is a nonvoting member of the House of Representatives.

“Congress routinely treats Puerto Rico and the other territories worse than it does the states,” said Pierluishi, pointing out that medical and other benefits paid to the territory are considerably less than those provided to states. "It is little wonder then that Puerto Rico is in recession, has excessive debt and is bleeding population. Unequal treatment at the federal level, combined with mismanagement at the local level, has a debilitating effect on the island's economy."

No bankruptcy protection

Pierluisi has sponsored a bill in the House asking that Puerto Rico be granted bankruptcy protection, the ability to restructure in order to pay off debt. Bankruptcy is open to U.S. municipalities — the city of Detroit filed for bankruptcy in 2013 — but not to territories.

“The alternative is a legal no-man’s land that benefits neither Puerto Rico nor those who have loaned the territory money,” Pierluisi said.

His bill is still in committee, but bankruptcy protection for Puerto Rico has gained support from some presidential candidates. “We’re not talking about a bailout. We are talking about a fair shot at success,” Democrat Hillary Clinton said in a statement Tuesday.

"I think that Puerto Rico ought to be treated as other states are treated as it relates to restructuring," Republican Jeb Bush said during a visit to the island in late April.

While Puerto Rico has a population of 3.5 million, almost 5 million Puerto Ricans and their descendants now live in the States, many of them in the swing state of Florida where they are voters to be courted.