Puerto Rico's rapidly escalating financial crisis

The financial crisis in Puerto Rico is escalating fast; the island has taken a sudden step to declare a state of emergency and move toward a unilateral moratorium on all government debt payments, thereby rejecting efforts by the US to allow it to restructure only under close federal supervision. This has taken both Wall Street and Washington by surprise, however, despite the move by Puerto Rico, the House Natural Resources Committee still intends to update its draft plan to rescue the US territory. This follows a move by creditors of Puerto Rico's Government Development Bank (GDB) to sue in a bid to prevent it from distributing money to creditors in what they call "preferential transfers" ahead of the GDB's 1 May debt payment that Puerto Rico's Governor says may not be payable. Puerto Rico has $70bn in debt, a 45% poverty rate and a shrinking population.

Puerto Rico took steps on Tuesday toward a unilateral moratorium on all government debt payments, rejecting efforts in Washington to allow it to restructure only under close federal supervision.

The Puerto Rican Senate authorized a declaration of emergency and a debt moratorium at around 3 a.m., after hours of debate. The island’s House of Representatives was debating such a measure late Tuesday but had not yet voted. Any bill would need to be signed by the governor, Alejandro García Padilla.

The sudden moves seemed likely to complicate efforts in Washington to enact a rescue package for Puerto Rico. The House Natural Resources Committee, which has been drafting the rescue in consultation with Democrats in Congress and the Treasury Department, said it still planned to issue an updated version on Wednesday, despite Puerto Rico’s action.

The rescue involves sensitive constitutional issues, and the drafters have been trying to strike a balance between Democratic and Republican Party priorities. So far, the lawmakers in Congress have called for sending a federal oversight board to Puerto Rico, auditing all major branches of government there, promoting fiscal reforms and eventually providing certain restructuring tools that are normally available only in bankruptcy.