Why Puerto Rico’s Economy Matters for U.S. Security


Summary below updated: 7 July, 2015

With the Greek debt crisis still evolving (and unresolved), all eyes are on the European Union. Even here in the United States, folks are keeping a close eye on what all of this will mean for Greece—and, on a larger scale, for the E.U.’s future. But in the meantime, there’s a debt crisis much closer to home that’s gotten too little attention: Puerto Rico’s.

On June 29, after years of working to reassure creditors, Puerto Rican governor Alejandro García Padilla announced that the island’s debt was “not payable,” calling for a postponement of debt services. But here’s the catch: despite persistent lobbying from the island, Puerto Rico cannot currently file for Chapter 9 bankruptcy. In the United States, cities and states are eligible for Chapter 9 protections, but Puerto Rico’s unique status as a U.S. commonwealth puts it in a tricky position.

Meanwhile, Puerto Rico’s debt crisis—not Greece’s—has far-reaching implications for the United States. U.S. financial institutions hold almost all of Puerto Rico’s staggering US$72 billion of debt (more than five times the Greek debt they hold). And since Puerto Rico’s bonds are exempt from local, state, and federal taxes, they have been traded extensively in U.S. markets and are included in over half of all U.S. municipal bond funds today.

Now, the Puerto Rican government, the U.S. government, and U.S. investors alike face the daunting challenge of resolving the debt crisis—and that will take more than austerity measures and debt restructuring.

Far-reaching structural reforms that address the island’s long ailing economy are the name of the game—but it may be an uphill battle to get there. Puerto Rico isn’t out of options—far from it. U.S. congressional intervention could go a long way, whether through granting Puerto Rico Chapter 9 bankruptcy protections, repealing the Jones Act, or exempting Puerto Rico from the federal minimum wage law.

Ultimately, resolving Puerto Rico’s debt crisis will require both knowledge of the island’s path toward development, a thorough understanding of its deep-seated economic troubles. It will be an uphill battle, and it won’t bear fruit overnight. But the analysis and the recommendations detailed in this January 2014 report—“Why Puerto Rico’s Economy Matters for U.S. Security”—are, as a result, timelier than ever.

The report describes how Puerto Rico arrived at this massive debt crisis, foreshadows its current predicament, and then goes on to propose practical solutions to improve the island’s competitiveness and set it up for a prosperous and stable future.

In the end, as Puerto Rican finances become further strained, it is imperative that the U.S. government develop long-lasting solutions—both to the current debt crisis and to the island’s long history of economic instability.


José J. Villamil is chairman of the board of the consulting firm Estudios Técnicos, Inc., and, until December 2012, of BBVA Puerto Rico.

Foreword by Carl Meacham

Jose J. Villamil