Rebuilding Puerto Rico 3: Debt


Puerto Rico is broke.

Ok, not exactly broke, but the island has been defaulting on bond debts (e.g. failing to pay them) for the better part of 3 years. The island’s government has accrued over $120 million in liabilities – of which $79 million are sovereign debt, and the rest are primarily unfunded pension liabilities. The process for defaulting on this debt has been halted by the Puerto Rico Oversight, Management and Economic Stability act, also known as PROMESA (Spanish for promise).


The legislation was signed into power by president Obama on June 30th 2016. Payments on bond debt and other treasury outflows were suspended by then-governor Alejandro García Padilla on July 1st of the same year. This meant the Commonwealth of Puerto Rico entered a restructuring process that halted all litigation regarding government payment defaults, but also established an unelected Fiscal Control Board to ensure austerity resumes.

The board numbers 7 highly respected businesspeople and public servants, all of whom are experts in bankruptcy and default law. The board reserves the right to freeze all further government employment, and enter into privatization contracts of government-owned assets (such as the island’s infrastructure holdings, public parks etc.) which sparked no small amount of controversy.

The oversight committee can also veto issuance of new debt, and get final say on budgets and fiscal plans – effectively deciding which projects in the government get funded. The committee is independent of Puerto Rico’s authorities or citizens, and was appointed by the president. Regulations regarding these measures require that appointees to the committee have a business or residence in Puerto Rico, but the truth remains that only one of the voting seats is filled by a Puerto Rico official.

Criticisms of PROMESA are manifold, from all sides of the political spectrum. Some say it goes too far, others that it’s a quick fix without concern for the underlying economic and political realities facing Puerto Rico – that it cannot file the same kind of bankruptcy claim that New York City and Detroit used to consolidate un-payable debt, that it remains without a path to statehood, and that federal dollars won’t be relieving this part of Puerto Rico’s hardship any time soon.

Posited fiscal reforms are criticized for being “too little, too late.”


The COFIM (Municipal Government Finance Corporation) is a newly created public corporation and instrumentality of the Commonwealth of Puerto Rico, attached to the Government Development Bank. COFIM is authorized to issue and use other financing mechanisms to pay or refinance the debts of Puerto Rican municipalities payable or backed by the municipal sales and use tax.

The current municipal fiscal situation isn’t as dire as one would think – 36 out of 78 municipalities actually have achieved a budget surplus in 2016. How, then, can the debt be so astronomical?

The answer to this question lies in the debt’s structure. It isn’t, as a layperson would assume, focused in the treasury or development bank – rather, it is dispersed over a number of state-owned corporations and subsidiaries. Let’s take a look at the numbers:

TL;DR – All of Puerto Rico’s public corporations run a deficit.

It’s not an attractive table to look at, but the story it tells is worrying – even though local municipalities often have wise and frugal governance, it matters not. The level of government above the municipality borrows and spends with much less accountability than do the local polities. True to form, the island’s largest municipality, San Juan, sports one of the highest per-capita levels of debt.


All debts have a claimant – be they individuals, businesses or investment consortiums. Puerto Rico’s situation is no exception – many people vested confidence in the authorities of Puerto Rico that they can pay back with interest. However, the intelligent among them realized that the special status of not-state gave the Puerto Rican government certain advantages in bond issuance.

This, coupled with not overly conservative fiscal and monetary policy on the Puerto Rican government’s part lead to a massive accrual of unpayable payables and unreceivable receivables, in the national corporations and the treasury alike.

Nothing startup societies are good at can change this. Debts must be paid, defaulted on or delayed. Refinancing is out of the question, as is further borrowing of any kind. What startup societies can do to Puerto Rico’s debt problem is to make certain that bureaucratic inefficiency and insolubility only affect local communities instead of ruining entire economies.


The debt holders of Puerto Rico are willing to put up a hard fight, even with the situation on the island being as it is. Even though the U.S. president advocated for „wiping the debt“, the debt structure is such that hardly anybody can be shorted their claim.

The financial risks are so worrying, in fact, that they are starting to overshadow the damage of the hurricane in terms of media attention. The solutions we have outlined will perhaps not save Puerto Rico outright, but will ensure that such an event may never happen again.

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