FOR more than two years Alejandro García Padilla, Puerto Rico’s governor, told the island’s creditors what they wanted to hear. The autonomous American territory, he said, had a “moral obligation” to service its $72 billion debt. It could not default on its “general-obligation” bonds, he added, because its constitution gives payments on them priority over all other expenses. He called attention to his record of tax increases and spending cuts. But after 30 months of reassurances, the governor reversed course this week and announced that he would seek to restructure Puerto Rico’s liabilities. “The public debt…is unpayable,” he declared on June 29th. “This isn’t about politics. It’s about math.”

Mr García Padilla demanded a multi-year moratorium on debt service. “The alternative”, he says, “would be a unilateral and unplanned non-payment of obligations.” Puerto Rican bond yields duly soared, and shares in the island’s banks, which own lots of the bonds, plunged.

Mr García Padilla’s announcement coincided with the release of a report by Anne Krueger, a former IMF official, that painted a grim picture of the island’s economy. It has been contracting in real (ie, inflation-adjusted) terms since 2006, and is now 14% smaller than a decade ago. In nominal terms it has been flat since 2012 (see chart). One reason is the expiry in 2006 of an exemption from federal tax for the Puerto Rican operations of firms from the mainland. But Ms Krueger lists a litany of woes, with striking parallels to the week’s other troubled debtor, Greece.

Both sit at the southern edge of a large currency union and have benefited from big transfers from richer regions. Both lost competitiveness as a result of the strength of those currencies combined with inflexible labour markets. America’s minimum wage applies in the territory, but local workers are less productive than their counterparts on the mainland (the minimum wage is equivalent to 77% of Puerto Ricans’ average income). Worse, federal welfare payments can exceed the minimum wage by half. The disincentives to hire and to work have suppressed Puerto Rico’s workforce-participation rate to a dismal 40%. High labour costs have been compounded by the exorbitant prices charged by the inefficient power company. Puerto Rico, like Greece, added to its problems by borrowing profligately to fund generous public payrolls at artificially low interest rates—in Greece’s case because lenders assumed the European Union would back the debt; in Puerto Rico’s because income from its bonds is tax-exempt for mainlanders. Both have seen their tax bases dwindle as younger workers have emigrated: Puerto Rico’s population has shrunk by 10% over the past decade. Both hid their liabilities amid a thicket of bureaucracy: Ms Krueger calculates that, what with losses at state-owned firms and unfunded pensions, Puerto Rico’s public sector runs a bigger deficit than the government admits—perhaps 5% of the island’s output. Both have responded to surging bond yields with austerity, which has deepened their recessions and made it harder to service their debts as tax revenue has fallen. Puerto Rico’s latest fiscal report said that, without new loans, it would run out of cash by October. Ms Krueger’s report reinforces the consensus that debt relief is needed. But finding a mechanism to trim the island’s liabilities will not be easy. Because Puerto Rico is not independent, it cannot repudiate its debts and devalue its currency. But it is not one of America’s 50 states either, and so does not qualify for the municipal-bond section of federal bankruptcy law. The island’s assembly passed a law allowing state-owned firms to restructure their debts, but America’s courts threw it out. Puerto Rico’s municipal-style debt contracts do not have the “collective action” clauses that allow many sovereign defaulters to force minorities of recalcitrant investors to accept a loss. As a result, every creditor who does not receive full payment can file a lawsuit. The legal protection the island has given to some creditors—the constitutional guarantee on general-obligation bonds, and special recourse to sales-tax revenues for another category of bondholder—gives them little incentive to be flexible. Unflinching investors may even be able to stop their more conciliatory counterparts from receiving a penny until they are paid in full, by exploiting a recent precedent regarding Argentine debt.

Resolving this impasse will require intervention from America’s federal government. Congress could appoint a committee to administer the territory’s finances, allow Puerto Rico’s state-owned firms to declare bankruptcy or bail out the island directly. Making permanent an interim ruling that allows firms whose subsidiaries pay excise tax in Puerto Rico to claim a federal tax credit would help. Many reforms needed to revive growth must be ordered from Washington, such as exempting Puerto Rico from the minimum wage and from a law that bans foreign vessels from shipping goods between American ports. Unfortunately, although Mr García Padilla says he will no longer “kick the can down the road”, the federal government has not displayed the same urgency.