--- title: Puerto Rico's Financial Crisis: Is The Island The New Greece? | TIME description: The island is in dire financial conditions and it is thousands of U.S. mom-and-pop investors that might lose a big part of their savings if the small territory goes bankrupt. canonical: https://time.com/video/4J1YQOCG/ og:title: Puerto Rico's Financial Crisis: Is The Island The New Greece? og:description: The island is in dire financial conditions and it is thousands of U.S. mom-and-pop investors that might lose a big part of their savings if the small territory goes bankrupt. og:url: https://time.com/video/4J1YQOCG/ og:image: https://cdn.jwplayer.com/v2/media/4J1YQOCG/poster.jpg?width=720 og:type: video.other twitter:card: summary_large_image twitter:title: Puerto Rico's Financial Crisis: Is The Island The New Greece? twitter:description: The island is in dire financial conditions and it is thousands of U.S. mom-and-pop investors that might lose a big part of their savings if the small territory goes bankrupt. twitter:image: https://cdn.jwplayer.com/v2/media/4J1YQOCG/poster.jpg?width=720 --- # Puerto Rico's Financial Crisis: Is The Island The New Greece? > Sponsored content. 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They are at time.com/newsletters and are separate from a paid subscription. ## Video: Puerto Rico's Financial Crisis: Is The Island The New Greece? [Watch (HLS stream): Puerto Rico's Financial Crisis: Is The Island The New Greece?](https://cdn.jwplayer.com/manifests/4J1YQOCG.m3u8) (3:27)  _Published 2014-03-11. The island is in dire financial conditions and it is thousands of U.S. mom-and-pop investors that might lose a big part of their savings if the small territory goes bankrupt._ --- Jul 27, 2023 4:17 PM UTC --- ## More From This Series [All Videos](https://time.com/video/) [Puerto Rico's Death Toll From Hurricane Maria Rises to 45](/video/Re0H0g9T/) ### Puerto Rico's Death Toll From Hurricane Maria Rises to 45 [Puerto Rico Debt Crisis Could Hit U.S. Mutual Funds](/video/vVmWgZu1/) ### Puerto Rico Debt Crisis Could Hit U.S. Mutual Funds [How Puerto Rico's Record Debt Is Worse Than Detroit's](/video/6LVpckuh/) ### How Puerto Rico's Record Debt Is Worse Than Detroit's --- ## Transcript [ MUSIC ] When it comes to finance, you don't usually think of Puerto Rico. But the small territory is in dire financial condition. And if the island goes bankrupt, thousands of people in the United States could lose a lot of money. Here's what you need to know. The government of Puerto Rico sold bonds to American investors for decades. Governments, just like households, take out debt to cover their expenses. This debt is divided into many small pieces called bonds. The bonds are sold to the financial markets. And investors buy them, and this is how they become bond holders. Puerto Rico had an eager group of buyers because of a special advantage. Puerto Rico's bonds are triple tax exempt. This means that bond holders of Puerto Rico's bonds don't pay federal, state and local taxes. So Puerto Rico kept issuing new debt, and investors kept buying and buying, and buying, until the island of less than 4 million people, accumulated a $ 70 billion debt. That is a debt per capita of $ 10, 600, ten times the median for US states. There are tens of over- indebted countries all over the world. Why does Puerto Rico make US investors lose their sleep? Because it is US investors that own Puerto Rico's debt. Almost 70 % of all US mutual funds have Puerto Rico bonds, but for decades nobody seemed to worry. Puerto Rico kept issuing new debt to pay for old debt, and ratings agencies gave the island good ratings until a perfect storm hit the island. There are three main factors that led to the crisis. In 2006, a law that incentivized US companies to do business in Puerto Rico expired. This means that many US companies left the island. The 2008 financial crisis gave a strong blow to the island's tourism. And because there was no economic growth, people kept leaving the island. So Puerto Rico's per capita income reached around $ 15, 000. Half of that of Mississippi, the poorest US state. The situation came to a peak in 2013. That's when Detroit went bankrupt. That showed investors that no city is too big to fail. Detroit had around 20 billion in debt. Puerto Rico has more than three times this amount. The federal government did not bail out Detroit, so a Puerto Rico bailout seems even more improbable. The island's government passed austerity measures to get its finances in order. A tax increase of $ 1. 3 billion, hiring freezes for vacant positions in the public sector. A public pension reform that cut pensions and increased the retirement age, and spending cuts that cut the deficit in half. But it was too late. In February, ratings agencies downgraded Puerto Rico's bonds to below investment grade. That's junk status. [ MUSIC ] So what does this all mean for everyday Americans? Puerto Rico runs the risk of going bankrupt. So thousands of everyday Americans that have invested their savings in mutual funds that owe Puerto Rico's debt might lose a lot of money. 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