“The Debt Crisis that surrounds Puerto Rico: Financial Colonialism, Absent Governance, and the not so Invisible Hand”

By  Ricardo Muñoz Carbonell  

This research began by exploring the probability of default by the Puerto Rican Government and its agencies. We have uncovered that holding Puerto Rican securities may be subject to pending violations of the international human right to self-determination. There are two main reasons behind this risk. The first is that United States Congress approved a Constitution that only gave Puerto Rico partial autonomy. This caused misinterpretation in the United Nations when they evaluated the island’s sovereignty back in 1952. The General Assembly then approved resolution which ceased annual reports to be issued to the Secretary General on the island’s economic and social status. The second is the Urgent Interest Fund Corporation (COFINA). This is the financial instrument that collects tax revenues on Puerto Rico’s Gross Domestic Product and pays institutional bondholders. We conclude that (1) US corporate operations in Puerto Rico have been hidden from international institutions of governance. (2) That Puerto Rican securities may have been purposely overvalued by credit rating agencies to serve as offshore holdings. (3) That COFINA is an instrument of financial colonialism that looks to satisfy the interests of bondholders at the expense and benefit of the Puerto Rican Nation. (4) When the United States of America liberates the political prisoners currently serving life sentences for crimes aimed to the interdependence of Puerto Rico; (5) That once (i) United Nations reevaluates the case of Puerto Rican sovereignty and votes for Puerto Rico to be a free and independent state; when the (ii) United States pays reparations to the Puerto Rican people for the damage that decades of colonial repression caused; and (iii) once a restructuring plan has been agreed and the Puerto Rican Nation is on a path of self-determination; Puerto Rico, in good faith, credit and taxing power, will responsibly service its general obligation bond of 2014, Series A.

The Overlooked Legal History

The Jones act of 1917 created the bond structure through which Puerto Rico could issue securities exempt from federal and state taxes.[1] This allowed Puerto Rico to access capital from financial markets with relative ease. The stock of public debt began to unsustainably grow since 1973 and today exceeds 70billion USD.[2] From the latest financial reports, the government of Puerto Rico cannot service payment to security holders.[3] The amount of debt accumulated b Puerto Rican bonds is a financial phenomenon which was a topic of recent discussion at the United States Congress. It has also brought up the question of Puerto Rican sovereignty in the United States Supreme Court.[4] After 63 years of being a dormant discussion the island’s colonial status is expected to be reexamined by the United Nations within the next year.

The United States of America failed to grant Puerto Rico complete sovereignty in 1953 when it established the Commonwealth.[5] Bondholders who invested in Puerto Rico held guaranteed-nofail securities because there was no law that protected Puerto Rican institutions under Chapter 9.

It wasn’t until September 2015 that United States Congress passed bill H.R. 4199 where Puerto Rico is granted the choice to restructure its municipal debt.[6] For almost one hundred years the possibility of default by issuing institutions did not legally exist. The possibility of bankruptcy only exists now after S. 1774 where Puerto Rico is treated as a State for purposes of chapter 9. Therefore, governmental agencies and corporations were forced to carry over their debts by issuing new bonds every time operating revenues did not suffice for payment on the principal.

In 1953 the United Nations approved resolution 748 (VII), where it is stated that Puerto Ricans “exercised their right to self-determination” and had “achieved attributes of political sovereignty”7. This is far from the truth. During the administration of Luis Muñoz Marin, Puerto Rico’s constitution was enacted to form the government of the Commonwealth. That administration has been proven to be an extension of the United States passive governance over the Island[7]. Also in 1953 the United States of America’s delegate to the United Nations achieved majority approval of resolution 1514 where “new outlines for determining whether or not an obligation exists to transmit the information called for under article 73e of the Charter” [8] The creation of this semi-autonomous local government structure[9] exempted the United States of America from issuing annual reports on Puerto Rico’s social and economic conditions[10] to the United Nations Secretary General. This allowed for United States corporations to utilize Puerto Rican bonds as offshore tax exempt holdings so long as Puerto Rico continued to indebt itself.

Credit ratings on the Commonwealth of Puerto Rico have been historically positive. For 30 years Moody’s rating on the island’s economy didn’t fall below Baa1. Outlook was kept between Positive and Stable until April of FY2004. It wasn’t until September of FY2004 that Moody’s outlook changed to negative. Their published rating did not change until 2006 when Moody’s downgraded the rating to Baa2. Outlook was changed to negative/credit watch. In 2015 rating on the overall economy of the island is Caa3 and outlook is said to be negative.

Debt to GDP ratio in 1970’s was 35%. Over six decades of financial mismanagement debt was allowed to grow until in 2015 it was 91% of the islands total GDP.[11] Puerto Rico’s GDP ratio is currently just above the United States’ in 2011 (90.1%).[12] PR’s Gross Domestic Product is expected to be 70,740million USD. From the following chart we can see how Puerto Rican debt has grown since 1973.[13]



This how can it be that Moody’s overlooked this irresponsible trend in the government of Puerto Rico indebting itself? The budget for the Island in 1970 was 970 million in respect to 1,658 million of debt. Over the years it grew but it is just below a third of the debt. This could be a huge case of fraudulent rating that requires further study. It needs to be investigated through combination of a financial analysis on the Commonwealth’s accounts, and an inquiry as to the accounts of institutional investors such as MBIA INC. and Assured Guaranty LTD. These two recently struck a deal with the Puerto Rico Energy and Power Authority (AEE). [14]

The US congress has recently put new mandates into motion to help the Puerto Rican Government in this time of financial crisis. They have approved H.R. 4524 where they insure child care for families under the applicable Federal poverty line.[15] However, this child care will not arrive until the end of fiscal 2026. In December of 2015 they passed S. 2436 where they outline the means by which Congress will provide assistance and reform relating to the territories. In it they state that the purpose off the act is to:

 “(1) provide a limited period of time to permit Congress to enact comprehensive relief for the Commonwealth, providing it the necessary tools to address its economic and fiscal crisis; and (2) provide the Commonwealth Government with a tool it needs to address an immediate and imminent crisis that is unprecedented in the history of the United States”. [16]

On the same day they approved H.R. 4290 where they outline forms of relief. [17] However, it is S. 2381 that outlines all the details involving Taxes, Public Pensions, Puerto Rico Financial Responsibility and Management Assistance Authority, Establishment and Organization of Authority, Control Period, Issuance of Bonds and Other Duties of Authority. They also allowed S. 1774 where they When U.S. congress passes bills that control the administration of Puerto Rico.

Clearly, the Island of Puerto Rico holds no kind of sovereignty. The acts and laws passed by the United States only extend Puerto Rico’s colonial status as a territory. The laws they should be passing must be in line with paying for reparations to the Islands of Vieques and Culebra, which suffered years of bombardment as zones of target practice by the US Navy.

For the rents never paid by the military bases of Ramey, Roosevelt Rhoads and others. Amending the Jones Law of 1917 which prevents Puerto Rico from entering world trade efficiently.[18] Currently the Jones Act allows for only 200 unseaworthy ships to import and export goods to and from Puerto Rico.[19] And for allowing for billions of dollars from Puerto Rican tax payers to be robed in an offshore scheme disguised as bonds.

The Urgent Interest Fund Corporation (COFINA)

The Urgent Interest Fund Corporation was given the mandate by US congress to prioritize the paying of extraconstitutional debt directly from collected taxes on sales. US Congress approved this in December 26, 2006 as part of H.B. 3163 No. 291. This corporation is in charge of collecting taxes on the sales of goods and services, paying bondholders their due payments and then giving the rest as budget to the Puerto Rican government. COFINA is also allowed to issue bonds in the case that tax revenues do not suffice to cover the cost of extraconstitutional debt. [20]

The Urgent Interest Fund was strengthened by US congress in 2006. This the same year that Moody’s downgraded their rating on Puerto Rican Funds. Institutional investors who no longer were allowed to hold Puerto Rican bonds of a lower grade would’ve had to sell at this time. However, unregulated investors were guaranteed their interest payments through mandate of US congress.

The International Decade for the Eradication of Colonialism did not keep Puerto Rico under its agenda between 1980 and 1990.[21] It was only reappeared in year 2000 when U.S. Navy occupied the municipal Island of Vieques and used its beaches as a military target practice range. However, it is expected to reappear in the coming year.


Puerto Rico must be relieved of its debts which have been caused by six centuries of colonialism by the United States. The situation has been overlooked by international governance agencies but it must be brought to light so that Puerto Rico may commence governing itself and begin introducing itself to international capital markets. The United States must liberate Puerto Rico and its political prisoners. Puerto Rico must be made whole by the United States and Spain for centuries of colonialism. Once Puerto Rico is free, they will be able to pay their general obligation bond of 3,500million USD.


[1] Jones Act of 1917, Article 3

[2] Economia Politica de Puerto Rico 1950-2000 

[3] Commonwealth of Puerto Rico, Financial Information and Operating Data Report.

[4] Puerto Rico v. Sanches-Valle

[5] Constitución de Estado Libre Asociado de Puerto Rico, 1951

[6] H.R. 4199 – Puerto Rico financial Stability and Debt Restructuring Choice Act, 114th  Congress (2015-2016) 7 Resolution 748 (VII)

[7] Guerra Contra Todos los Puertorriqueños, Nelson A. Denis

[8] A/RES/1514 (XV)

[9] Constitución de Estado Libre Asociado de Puerto Rico, 1951

[10] Article 73 of the UN Charter

[11] Junta de Planificación, años 2000-2012.

[12] World Bank Data, Central Government Debt total (% of GDP)

[13] Junta de Planificación, años 2000-2012

[14] The Bond Buyer, Bond Insurers Avoid Haircut in PREPA Deal.

[15] HR 4524

[16] HR 2436

[17] HR 4290

[18] Journal of Maritime Law & Commerce, We and Mr. Jones.

[19] Jones Act 1917

[20] H.B. 3163, No. 291

[21] Resolution 1514



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