Yesterday the world was fully braced for financial catastrophe in Greece. Then Puerto Rico suddenly burst into the news with its own shocking admission: Its government is also broke and can't pay back $79 billion in debt.
In Florida, where more than two million Puerto Ricans call home, the news left many with questions. How exactly did an idyllic island rack up an El Yunque's worth of bad debt, and what does its looming bankruptcy mean to the Sunshine State?
Here's your primer on the crisis:
Puerto Rico Gov. Alejandro Garcia Padilla
via U.S. Dept. of Labor
What the hell is going on in San Juan?
On Sunday, Puerto Rico Gov. Alejandro Garcia Padilla admitted to the New York Times that $79 billion in government debt is "not payable," hinting at a looming failure to repay its massive obligations. Padilla was expected to expand on whether he would declare a default in a conference call with investors yesterday afternoon. Instead, the government accidentally webcast the game show ¿Quién Sabe Más? Yes, this really happened.
OK, but how did Puerto Rico get in so much debt in the first place?
The same way plenty of Floridians got in the same kind of trouble: the double-whammy of bad financial management coupled with a crippling global recession.
Puerto Rico's government has spent recent decades grossly overestimating how much tax revenue will come in. When those taxes don't arrive — in part thanks to a bad habit of letting scofflaws get away with avoiding their payments and luring businesses to the island by waiving their taxes — the government let its agencies keep spending anyway and just took out more and more bonds to keep everything running.
That short-term thinking began to fall apart with the 2008 global slowdown. A report from Puerto Rico's government released over the weekend shows that even with the rest of the U.S. in a healthy recovery, the island's economy has never rebounded.
It doesn't help that Puerto Rico has been losing people like crazy in the meantime. The island's population is dipping by about 1 percent a year, with hundreds of thousands migrating to Florida's more robust economy.
Is this a new problem?
Uh-uh. Two years ago, New Times published an investigative piece about Puerto Rico's deep problems with economic free-fall and rampant crime. "Americans who ignore the island do so at their own peril," the report stated. "As Puerto Rican politicians make an unprecedented push to become the 51st state, the commonwealth has become more central than ever to the United States' drug and crime problems."
Will Obama help Puerto Rico get out of this mess?
Nope — at least not directly. The White House yesterday said there's no chance of a federal bailout for the island, which many in Washington believe has been plagued by terrible governance.
That leaves Puerto Rico with few great options. Unlike a city such as Detroit, PR can't declare Chapter 9 bankruptcy. There's a bill in Congress to help reduce the debt levels for some of the obligations, but it's not clear if it will go anywhere.
The nuclear option would be a full default. Puerto Rico's government agencies — from power to schools to pensions — could shut down. Bondholders in the U.S. would take a major hit.
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Does this affect Florida at all?
Most definitely. South Florida is one of Puerto Rico's biggest trade partners, and the millions of Puerto Ricans living and working in Florida are a key part of the economy back home. A default would throw a major wrench into Florida's recovering economy. Investors are already feeling the pinch: Major banks headquartered in Miami with big business on the island already saw shares dip by double digits yesterday.
How are Puerto Ricans dealing with all of this?
About as you'd expect: