Close panel

Close panel

Close panel

Close panel

Analysis and opinion Updated: 06 Jul 2016

Lessons from the Puerto Rico debt crisis

After the Senate’s passage of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), Puerto Rico’s debt saga will enter a new chapter: closure. The bill will be signed by President Obama after receiving bipartisan support in both the House and Senate. Collective action from House leaders Paul Ryan and Nancy Pelosi and the White House at the outset has allowed for a timely and smooth passage, avoiding complications from missed payments due on July 1.

Image of uerto Rico Oversight, Management, and Economic Stability Act (PROMESA),

At the heart of the bill is the creation of a seven-member Financial Oversight and Management Board that will oversee the fiscal and budgetary decisions of Puerto Rico with advisement of Puerto Rico’s president. The seven-member board will be appointed by the president, with six members recommended by Congress. Initially, the board will be comprised of three Democrats and four Republicans. In terms of the budgetary effect, the bill is not expected increase net liabilities for the federal government, as all of the $370 million in estimated costs will be paid for by the commonwealth. Instrumentalities including the 78 municipalities, Government Development Bank of Puerto Rico, public utilities and corporations, and public entities within the territory will also fall under the oversight of the board.

A legal framework and protections were also added to the bill to facilitate an orderly restructuring of Puerto Rico’s $70 billion in outstanding debt. To allow the board time to develop bylaws and procedures, the bill also places a stay on existing claims dated retroactively to December 2015. Other major provisions included in the bill:

  • Puerto Rico retains the right to determine future political status with respect to U.S.
  •  Reduction in minimum wage for most Puerto Rican workers under age 25
  • Possible modifications in overtime pay
  • Specific procedures aimed at accelerating review and permitting, by Puerto Rico and U.S. government agencies, of specific types of infrastructure projects.

“I could write a bill that I think would be a better bill, but I don’t know that anyone could write a better bill that would pass the Congress that also solves the problem.

The bipartisan compromise and collaboration between Congress and the White House are welcome signs after years of inaction, histrionics and finger-pointing. However, the bill’s passage means that, for all intents and purposes, the burden is going to shift from the federal government to the private sector. In addition, there were concerns that the commonwealth was not given enough control over the process. In fact, Bernie Sanders called the bill "colonialism at its worst." That being said, not agreeing to a solution to resolve Puerto Rico’s crippling debt issues and weak institutional framework could have led to a dire situation for Puerto Rican citizens and stability of the existing government. In homage to compromise, and a possible harbinger of cooperation to come, Treasury Secretary Jacob Lew stated “I could write a bill that I think would be a better bill, but I don’t know that anyone could write a better bill that would pass the Congress that also solves the problem.”


Follow BBVA Research USA on Twitter at @bbvaresearchusa.

Any statement or opinion of an economist affiliated with BBVA Compass is that economist’s own statement or opinion and does not represent a statement or prediction by BBVA Compass, its parent companies or management.