Puerto Rico Is Becoming America’s Greece

Puerto Rican leaders have been warning for months that they couldn’t afford to pay back their $72 billion of debt. On Monday, the U.S. commonwealth made its failure official by defaulting on a loan. What comes next could go a long way to determining the island’s shaky economic future.

Here’s what certain: Puerto Rico’s Public Finance Corp. paid back just $628,000 due on a $58 million bond payment Monday; the deadline to pay was Saturday. Melba Acosta, the president of its Government Development Bank, said the legislature in San Juan didn’t provide enough money to pay back the full amount.

“This was a decision that reflects the serious concerns about the commonwealth’s liquidity in combination with the balance of obligations to our creditors and the equally important obligations to the people of Puerto Rico to ensure the essential services they deserve are maintained,” Acosta said in a statement.

The default isn’t unexpected; Puerto Rican Governor Alejandro García Padilla had previously said his country, weighed down by decades of slack economic growth and population flight, doesn’t have the cash to pay its creditors.

But it does mark a sharp escalation of the crisis, and pushes it into unknown territory. Puerto Rico owes about $5 billion of principal and interest over the course of the next 12 months, according to Bloomberg. About 20 percent of U.S. bond funds hold San Juan’s loans, so American investors do have exposure if San Juan and its creditors can’t come up with a plan to restructure the island’s debt load. That means money managers popular with American investors, like Charles Schwab and Franklin Templeton, would have to agree to get paid back less than what they’re owed. The value of the funds that contain Puerto Rican bonds would go down.

But the real challenge is that, as a U.S. commonwealth, Puerto Rico can’t file for Chapter 9 bankruptcy protection, something that Detroit did in 2013 when it went belly up. That would set up an orderly process for creditors to get back some of what they are owe. The House and Senate both have introduced bills that would give that power to San Juan, but they haven’t advanced through the lawmaking process. The White House has also ruled out a bailout similar to the one Greece is currently negotiating with its own creditors.

As it languishes, Puerto Ricans are dealing with a mounting number of crises. Amid a drought, water is being rationed there. It’s short on Medicaid funds, and more than 3,000 doctors have left the island over the last five years. Three former International Monetary Fund economists recently recommended closing schools there to save money.

On Aug. 1, a daily newspaper, El Nuevo Dia, published an interview in which Democratic presidential candidate Martin O’Malley — who is running far behind front-runner Hillary Clinton — called for Congress to give San Juan some relief. He is the first 2016 candidate to visit the island.

“The main thing we need to do is extend the same bankruptcy protections that we have on the federal level to Puerto Rico,” O’Malley said.

For now, at least, there’s no reason to think that will happen — and no reason to think that Puerto Rico’s economic nightmare will come to an end anytime soon.

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