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Puerto Rico Can’t Restructure its Debt, and Now It’s Really in Trouble

June 15, 2016, 9:00 AM UTC
Puerto Rican Governor Alejandro Garcia Padilla (C) speaks during a press conference in the framework of the Association of Caribbean States' summit on problems linked to climate, at Revolution Palace in Havana, on June 4, 2016. / AFP / YAMIL LAGE (Photo credit should read YAMIL LAGE/AFP/Getty Images)
Photograph by Yamil Lage — AFP via Getty Images

In an effort to tackle its insurmountable debt, Puerto Rico amended its bankruptcy code in 2014. The government in San Juan held out hope that this would give Puerto Rico the flexibility needed to restructure its debt and retard the sharp decline of the island’s economy. While such a move directly countered federal law, amendment supporters insisted that this self-governing Commonwealth had the autonomy to take such steps. But the U.S. Supreme Court just blew that idea out of the water. By a vote of 5 to 2, it ruled on Monday that this act—one that would have permitted the island’s public utilities to implement a debt restructuring plan—violated federal bankruptcy law.

The high court’s ruling signals that Puerto Rico is out of practical options and has little alternative but to await for Washington’s fiscally castigating hammer to fall. Budgetary retribution is expected to come in the form of a federally appointed control board empowered to bypass the budgetary powers of the island’s elected governor and legislature. For the moment, there appears to be no light at the end of the tunnel. Such a stark assessment may seem overly dooming. But in theory, there are always options. After all, couldn’t Puerto Rico simply circumvent the Supreme Court by threatening to leave the U.S. just as Greece has threatened to depart the Eurozone? It’s an interesting scenario, but ultimately unrealistic given it’s an issue at the heart of the Puerto Rico crisis: the island’s status.

The U.S. invaded Puerto Rico during the Spanish-American War of 1898. More than a century later, it remains a colonial dependency. While its residents are now citizens, they have no voice in the federal laws that profoundly impact their lives. States can vote for the president and send senators and representatives to Congress. That is not so with the residents of the country’s overseas possessions. Although Congress declared Puerto Rico a Commonwealth in 1952, it remains a territory subject to federal fiat. As the Supreme Court stated in 1901, this island is “a territory appurtenant and belonging to the United States, but not a part of the United States.” That fundamental aspect of federal-territorial relations has not changed. This stands in stark contrast with Greece, which never surrendered its autonomy upon entering the Eurozone.

Any threat to unilaterally change its status rings hollow for a host of reasons. First, local support for independence has remained in the single digits since the 1950s. Second, there are constitutional issues. Puerto Rico cannot alter its status—let alone separate from the U.S.—without congressional approval. To date, Congress has shown no interest in altering its status regardless of the alternatives: independence, statehood, or enhanced commonwealth. The 1952 Commonwealth Constitution did not emancipate the island from the federal Constitution’s territorial clause in Article 4. The same article that gives Congress the last word on the island’s status is also the source of congressional authority over Puerto Rico’s bankruptcy laws. Third, from a fiscal point of view, its economy has been completely intermeshed with the mainland economy. Fourth, there are familial matters. Today, the majority of all Puerto Ricans live on the U.S. mainland, not the home island.


While Puerto Rico has little choice but to stand by as the federal government re-imposes direct rule, there are options for individual Puerto Ricans. Indeed, they have been exercising alternative scenarios ever since the financial crisis began snowballing two decades ago. For an increasing number of islanders, the choice before them is to continue suffering or to leave, and the latter option is becoming increasingly popular.

Hundreds of thousands of Puerto Ricans have opted to relocate to the U.S. mainland, particularly to Florida, and that trend will only continue. The imposition of even higher taxes, continued cutbacks in Commonwealth government services, and other fiscally painful measures likely taken up by the federal control board will only inflame the conditions promoting this mass migration. And as more Puerto Ricans leave, the island’s tax base continues to shrink, making it all the harder for the Commonwealth to repay its debt. Puerto Rico is now caught up in a downward spiral of debt and mass migration, which makes it continually indemnify its debtors. For the time being, the Supreme Court’s ruling will simply add fuel to the migratory fire.

Amílcar Antonio Barreto is an associate professor of political science, international affairs and public policy at Northeastern University. He is also the director of its MA Program in International Affairs.