Last week Puerto Rico officially became the largest bankruptcy case in the history of the American public bond market. On May 3, a fiscal control board imposed on the island’s government by Washington less than a year ago suddenly announced that Puerto Rico’s economic crisis had “reached a breaking point.” The board asked for the immediate appointment of a federal judge to decide how to deal with a staggering $123 billion debt the commonwealth government and its public corporations owe to both bondholders and public employee pension systems. The announcement sparked renewed press attention to a Caribbean territory that many have dubbed America’s Greece. The island’s total debt, according to the control board, is unprecedented for any government insolvency in the U.S., and it is certain to mushroom quickly if no action is taken. Detroit’s bankruptcy, by comparison, involved just $18 billion — one-ninth the size of Puerto Rico’s. Within days, Supreme Court Chief Justice John Roberts, acting under a provision of the Puerto Rico Oversight, Management, and Economic Stability Act (known as PROMESA), which was enacted last June, appointed federal Judge Laura Taylor Swain from the Southern District of New York to take over the Puerto Rico case. A former bankruptcy court judge who was appointed to the federal court by President Clinton, Swain famously presided over the long criminal trial of employees of the Bernie Madoff Ponzi scheme. Few press reports on Puerto Rico’s troubles, however, have bothered to examine the deeper issues behind this crisis.

Governor’s palace party in Puerto Rico, circa 1900. Photo: Keystone-France/Gamma-Keystone/Getty Images

First, the colonial relationship that has prevailed between the U.S. and Puerto Rico since 1898 is no longer viable. Puerto Rico is the largest overseas territory still under the sovereign control of the United States, and it is the most important colonial possession in this nation’s history. That relationship produced uncommon profits for American subsidiaries on the island for more than a century, even as the federal government kept claiming that the Commonwealth of Puerto Rico, created in 1952, was a self-governing territory. But now, with a Washington-appointed board directly overseeing the island’s economy, and with a pivotal Supreme Court decision last year affirming that Congress continues to exercise sovereign power over Puerto Rico, the mask of self-governance has been removed. The old commonwealth is effectively dead. Absent a huge infusion of U.S. public dollars to prop up its collapsing economy, a scenario that is nearly impossible with a Trump White House and a Republican-controlled Congress, that relationship cannot be revived. Political leaders in both Washington and San Juan, whether they like it or not, are being propelled to fashion a new political and economic status for the territory. They will have to finally decide whether to completely annex Puerto Rico as the 51st state or acknowledge that it still remains a distinct nation, with the right to its own sovereignty and independence. Second, the impact of Puerto Rico’s bankruptcy will continue to reverberate throughout the U.S. bond market, far more than most Wall Street analysts have so far acknowledged. The PROMESA control board has warned that even with massive cuts to government services and new projected revenues from higher taxes and fees, Puerto Rico will still generate slightly less than $8 billion in budget surpluses over the next 10 years, when some $35 billion in debt service comes due. In other words, three-quarters of the debt cannot be repaid. That is not just a haircut for bondholders; it is a head-shaving, one that will send shock waves throughout the municipal bond market. After all, bonds backed by the full faith-and-credit of local government entities have long been considered among the safest of investments. Years of court battles between Puerto Rico and contending groups of creditors are now certain. “The economy of Puerto Rico will be put on hold for years,” Andrew Rosenberg, adviser to the Ad Hoc Group of Puerto Rico General Obligation Bondholders, told the Associated Press. “Make no mistake: The board has chosen to turn Puerto Rico into the next Argentina.”

A Puerto Rican flag painted on the doorway of an abandoned building in San Juan, Puerto Rico, on May 1, 2016. Photo: Erika P. Rodriguez/Bloomberg News/Getty Images

The Debt Is Not Payable Civil society groups contend that the plunder of the Puerto Rican people through predatory and even illegal bond deals that island politicians concocted together with top Wall Street firms will now be exposed. Amazingly, the 23-page petition that the federal government’s own financial control board filed in U.S. District Court in San Juan reached the exact same conclusion that Puerto Rico’s former Gov. Alejandro García Padilla reached back in June 2015 — that the island’s debt is “not payable.” In the nearly two years since García Padilla sounded the alarm, however, Washington has done almost nothing to alleviate the economic catastrophe afflicting 3.4 million U.S. citizens in Puerto Rico, except to establish the control board by enacting PROMESA. On an island that has lost 10 percent of its population in the last 10 years, where 46 percent of the population lives below the U.S. poverty level, where the unemployment rate is more than 11 percent, and where the labor force participation hovers around 40 percent, lawmakers in Congress have kept insisting on greater austerity from Puerto Rico’s population. The reality is such dire conditions would never be tolerated among U.S. citizens in any other jurisdiction, yet they are allowed to persist in Puerto Rico. During the past two years, the commonwealth government has sharply raised electricity and water rates. It has increased the sales tax (now a value added tax) to 11.5 percent. It has proposed ending all pensions for new workers and cutting existing benefits by an average of 10 percent. And last week, it announced the closing of 179 public schools for the coming school year. In addition, the control board has called for a $450 million cut over the next four years to the island’s 70,000-student public university. Under the control board’s pressure, Gov. Ricardo Rosselló, who took office in January, is eyeing the privatization of the government-owned electric company, the water and sewer authority, even the public transit system. But even massive cuts and selling off public assets can’t solve the problem that there aren’t enough jobs on the island, that young people keep fleeing to the United States, and that Puerto Rico’s government is powerless to fashion its own economic and trade policy independently from the U.S.

Photo: Alejandro Granadillo/Bloomberg News/Getty Images