Puer­to Rico default­ed on near­ly $2 bil­lion of debt pay­ments this morn­ing, includ­ing $780 mil­lion in con­sti­tu­tion­al­ly-guar­an­teed gen­er­al oblig­a­tion debt, almost exact­ly a year after the New York Times report­ed that Gov­er­nor Ale­jan­dro Gar­cía Padil­la had declared that the island’s debt ​“not payable.”

It is downright immoral to force them to endure pain and suffering so that investors can be paid triple-digit interest rates and get quadruple-digit returns on their investment for deals that may be illegal.

With­out a doubt, the debt is not payable because the Com­mon­wealth can­not pay all of it. The Commonwealth’s per capi­ta tax bur­den of $15,637 is more than 10 times high­er than that of the aver­age state ($1,419) and near­ly three times high­er than that of the high­est state (Con­necti­cut, with $5,491). But just as impor­tant­ly, Puer­to Rico should not pay every­thing that gets includ­ed in its total out­stand­ing debt because much of that debt is illegitimate.

The ReFund Amer­i­ca Project released a report yes­ter­day, called Puer­to Rico’s Pay­day Loans, that shows that $33.5 bil­lion of the island’s so-called debt is actu­al­ly inter­est on cap­i­tal appre­ci­a­tion bonds (CABs) — the munic­i­pal ver­sion of a pay­day loan. The Com­mon­wealth bor­rowed $4.3 bil­lion in prin­ci­pal and has to pay it back with 785 per­cent inter­est. More­over, because of the way these deals are struc­tured, most of the $33.5 bil­lion is inter­est that hasn’t even accrued yet. It is future inter­est. In oth­er words, this is not mon­ey that any­one actu­al­ly lent to Puer­to Rico. It is pure investor profit.

Fur­ther­more, 63 per­cent of Puer­to Rico’s CAB debt belongs to its Sales Tax Financ­ing Cor­po­ra­tion, more com­mon­ly known by its Span­ish acronym of COFI­NA. The COFI­NA struc­ture was cre­at­ed to refi­nance what was con­sid­ered at the time to be ​“extra-con­sti­tu­tion­al” debt — a term that no one has ever defined, but that sure doesn’t sound very legal. Although the Puer­to Rico Com­mis­sion for the Com­pre­hen­sive Audit of the Pub­lic Credit’s Pre-audit Sur­vey Report did not dis­cuss COFI­NA bonds specif­i­cal­ly, it allud­ed to the fact that there could be poten­tial grounds for legal­ly void­ing some or all of this extra-con­sti­tu­tion­al debt.

Final­ly, Puer­to Rico’s CAB debt is cur­rent­ly trad­ing on the sec­ondary mar­kets for as lit­tle as 5 cents on the dol­lar. That means that some of the bond­hold­ers who now own the debt bought it for 5 per­cent of its face val­ue, but they still want to be paid back the full face val­ue. The rea­son why they were able to buy the debt at such steep dis­counts was that the pre­vi­ous bond­hold­ers had already writ­ten down the loans as bad debt. They did not expect to be paid more than 5 per­cent of the prin­ci­pal, so they sold it to vul­ture hedge funds and oth­er cred­i­tors who are now look­ing to make a large prof­it of as much as 1,900 percent.

Bond­hold­ers are try­ing to make such exces­sive prof­its at a time when Puer­to Rico is in the throes of a dev­as­tat­ing human­i­tar­i­an cri­sis that is being exac­er­bat­ed by the aus­ter­i­ty mea­sures put in place to enable the island to pay back its debt. It is bad enough to force the peo­ple of Puer­to Rico to endure uncon­scionable cuts to pay off cred­i­tors. It is down­right immoral to force them to endure pain and suf­fer­ing so that investors can be paid triple-dig­it inter­est rates and get quadru­ple-dig­it returns on their invest­ment for deals that may be illegal.

Con­gress passed the Puer­to Rico Over­sight, Man­age­ment and Eco­nom­ic Sta­bil­i­ty Act (PROME­SA) this past Wednes­day, cre­at­ing an unelect­ed, colo­nial con­trol board to over­see the Commonwealth’s finances and restruc­ture its debt. The PROME­SA con­trol board will hold the future of Puer­to Ricans in its hands, even though they will not have any rep­re­sen­ta­tion on the board. The PROME­SA con­trol board must adopt prin­ci­ples that put Puer­to Ricans’ needs ahead of investor greed. To this end, it should:

Can­cel the $ 33 . 5 bil­lion in pay­day inter­est that Puer­to Rico owes on its CABs;

. bil­lion in pay­day inter­est that Puer­to Rico owes on its CABs; Inves­ti­gate the legal­i­ty of the extra-con­sti­tu­tion­al debt and take legal action to void any debt deemed ille­gal; and

Refuse to pay bond­hold­ers more than they paid to pur­chase the CABs.

These prin­ci­ples are a first step in ensur­ing that Wall Street investors are not able to prof­i­teer off the CAB debt on the backs of the peo­ple of Puer­to Rico. Legal­ly and moral­ly, that debt is not payable.

Cross-post­ed at the Roo­sevelt Insti­tute Blog.