Puerto Rico goes bust

Puerto Rico missed a $58m debt payment this week, two months after warning that it could no longer cope with its debt load. The US territory, which has a population of 3.5 million, owes $72bn, a total similar to the state of New York, which is six times larger.

The fundamental problem is that the economy is in a “death spiral”, as its governor, Alejandro Garcia Padilla, puts it. Local industry has been shrinking since 2006 as low-cost manufacturing drifts away to cheaper locations, notes Paul Krugman on nytimes.com.

Its island location and US maritime law, which make shipping to the mainland expensive, haven’t helped either. The federal US minimum wage is high relative to productivity, hampering employment. The government, meanwhile, “was slow to adjust to the worsening fundamentals, papering over the problem with borrowing”.

Now the territory looks stuck. It can’t declare bankruptcy and restructure its debts like Detroit did, because it is not a municipality or a state. Yet the island needs a haircut of $30bn-$40bn to get out “from underneath this debt”, says Peter Hayes of BlackRock. But many bondholders are reluctant to accept a haircut. Get set, says the FT’s Eric Platt and Nicole Bullock, for “a long and contentious restructuring process”.

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