Puerto Rico: A Debt Problem That Kept Boiling Over

Then Congress surprised them. Under a new law set up to govern Puerto Rico until its financial crisis recedes, an exception known as Title III was made to govern territories that want to shield themselves from creditors. Puerto Rico did this on Wednesday.

Now the small Caribbean island — home to some 3.5 million people, many of whom still feel the sting of the annexation of their ancestors’ lands in 1898 — owes approximately $34,000 in debt per man, woman and child. Their school budgets and other services are all being cut as part of the austerity planning.

How did things get this bad?

As some Americans have grown increasingly tax-averse and eager to shelter income, that 100-year-old provision helped successive Puerto Rican governments build up a debt big enough to crush the island.

As the problem swelled, so, too, did the exodus of the educated classes from the island. Many tipping points were reached and reached again.

On Friday, Chief Justice John G. Roberts assigned Puerto Rico’s case to Judge Laura Taylor Swain, a federal judge in the Southern District of New York and a former bankruptcy judge. The logistics of the case, which was filed in federal court in San Juan, are not yet clear.

Judge Swain has shown extensive familiarity with bankruptcy law, but the case is still expected to be long and contentious, with hedge funds arguing that Puerto Rico is violating a sacred constitutional pledge, unions clamoring to preserve labor contracts and some of the island’s advocates saying that certain bonds should be declared void.

Many creditors are targeting Puerto Rico’s federal oversight board, which has limited the amount available for debt service to $800 million a year for the next five years. They say this amount is absurdly low, relative to the roughly $3.5 billion a year coming due.

The debt…

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