Updated 07:50 AM EST, Sat, Jan 25, 2020

Puerto Rico Debt Crisis: the Root, the Effects & the Final Plan 

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Puerto Rico is one of the more problematic countries in South America with over $50 billion in debt that taxpayers have to pay. To sort out the problem, however, the Puerto Rican government decided to propose cutting the debt nearly in half to $26.5 billion, which did nothing to impress their creditors.

A source close to a major creditor told CNN Money, "It's frustrating, and it doesn't feel like a credible offer."

The debt did not reach such massive numbers without a bad turn, so how did Puerto Rico reach such low levels in their economy?

The New York Times noted that the free electricity in the country is one of the main reasons for their $9 billon dollar debt.

In 1996, Puerto Rico's finances started dwinding, greatly affecting their economy with bad finance strategy. However, despite their meager finances, the government decided that it should push on with multiple development projects. The first in this poorly-called strategy started with the Puerto Rico Electric Power Authority (PREPA), which gave free power to the island's municipalities, many of which were for government-owned enterprises and even for-profit businesses. However, the electricity was not free for Puerto Rico's citizens. Due to the massive power needs of the densely populated island, PREPA had to borrow more money, burrowing itself in debt in order to keep the electricity source afloat.

The government is now working through its massive debt and is already defaulting on their bonds. However, an effort is currently underway to limit the free electricity, which is costing them hundreds of millions of dollars.

And this is where the problem of Puerto Rican citizens comes in. Eduardo Bhatia, president of the Puerto Rico Senate, noted, "If the towns don't get free energy, they're going to have to pay for it by increasing their property taxes or something, so the people will end up paying."

This will not bode well with the islanders either, as the island only recently increased sales tax -- originally set at 7 percent, to the current sales tax of 11 percent.

At this rate, CNN noted that the crisis will lead to a court battle that may need the intervention of Washington politicians. The country is now so far in debt that its government already defaulted twice over the past year --- once in August and again in January, per CNN Money. As of the moment, the government agreed that the only way to keep their economy afloat is to trim their debt, proposing that creditors exchange their current bonds voluntarily for new bonds.

Puerto Rico's secretary of state Victor Suarez noted, "A crisis of this magnitude must be addressed in concert, otherwise we risk our ability and the opportunity to escape the spiral of a stagnating economy, endless deficits and increasing debt."

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