Puerto Rico’s Debt Crisis and the Origins of Statehood and Sovereignty

Puerto Rico has been in the news lately after its Governor, Alejandro García Padilla, stated that its public debts, especially those general debts not allocated toward a specific project or purpose, were unlikely to be repayable. It currently carries over $73 billion in debt, or over $10,000 per capita (which is itself not a meaningful measure, but is just a better way to abstract away differences in population). That’s twice as much as the nearest American state, Connecticut, which has a debt of $5402 per capita.

State Debts

Normally, bankruptcy is the choice path of action for any legal entity that is so indebted. Indeed, the legal function of bankruptcy is to discharge or restructure the gross amount of debt owed to creditors. Of course, this comes at the expense of reputation, in the form of reduced credit scores or, in the case of municipalities or corporations, ratings on the reliability of future debt outlays. And, of course, this loss of credibility increases the costs of borrowing in the future.

Puerto Rico’s approach to its debt thus far is to advocate for the extension of Chapter 9 bankruptcy rules to states and territories of the United States. Chapter 9 specifically provides for bankruptcy assistance in the case of municipalities. There is not actually any legal framework within which a state may declare bankruptcy.

As with all bankruptcy proceedings, it is important to remember that the legal responsibility for the debt is not absolved, but rather some amount of the financial responsibility for the debt is instead removed. The unstated assumption in this statement is that sufficiently large aggregations of people, in the form of states (strictly in the national sense, but to some degree territorial “states” also share some of these traits), can even be responsible for some amount of public debt. The function of the state as the least common denominator is a centuries old feature of international relations.

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Most historians point to the Peace of Westphalia as the turning point that established the conventions of sovereignty at the state level. This treaty, which ended the Thirty Years War and Eighty Years War in 1648, formally enshrined the right of royal sovereigns (traditionally princes) to determine the religion of the areas over which they ruled. The Catholic Church, by this act, had their formal influence restricted solely to the Papal States. Instead, they would have to liaise with the Catholic princes as equals in status.

The elevation of the state to the preeminent role in international relations also set the boundaries for what they could and could not do. Indeed, while one state could not legitimately interfere in the affairs of another one, states, as national wholes, were allowed to enter into formal agreements with other states. The religious conventions of the time did not allow for the charging of interest, but under this framework temporary extensions of financial aid were not unprecedented. By identifying the state as the basic unit of international relations, the modern political system began to come into existence. States, being unlikely to dissolve or disappear without some sort of audit record, could trade on their reputations as a basis for financing.

Of course, as Puerto Rico is learning, this reputation can only go so far. By stretching the limits of reasonable financial reality, the Puerto Rican government sought to walk the line between the coherence of its being as a representative of its population. The extension of bankruptcy capabilities, while strengthening the rights of sovereign entities, is actually meant to weaken their legitimacy in the case of its being applied.

PS. In researching this piece I learned that Vermont is the only state that has positively ratified every constitutional amendment. Some states choose to formally accept an amendment that has passed the limits of ratification after initially rejecting it.

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