Puerto Rico owes $70 billion in bond debt and an additional $49 billion pension obligation to government employees. There's is absolutely no possibility that those debts will ever be repaid. Puerto Rico's bonds have been tax exempt since 1917. Many people have invested in Puerto Rico bonds because they pay 10% interest (yields) and because under federal law they're "triple-tax free." This means that you could invest in Puerto Rico's bonds and earn 10% interest every year, and not have to pay federal, state or municipal tax on the interest you collect. There were other major tax benefits granted exclusively to those investing in Puerto Rico. The money that investors paid for these bonds has been essentially "free money" to Puerto Rico, since nobody there apparently believed that it would ever have to be paid back. The Hill and Daily Caller
As a result, Puerto Rico has felt free to spend huge amounts of money on social programs, with bills that are only now coming due.
The unemployment rate is 13.7%. Only 700,000 of the 3.5 million people, or 20%, work in the private sector. The other 80% either are on welfare, or they receive unemployment or other aid, or they work for the government. Year after year, Puerto Rico sold more and more bonds, and investors ate them up because of the high tax-free yields.
Through various financial tricks, Puerto Rico has managed to avoid bankruptcy until now, but bankruptcy proceedings finally began in May of this year.
A Puerto Rican default is likely to affect millions of Americans. Here's an example of how mainland U.S. residents are affected: More than 40 percent of the Rochester Maryland Municipal Bond Fund and the Rochester Virginia Municipal Fund are invested in Puerto Rican bonds. Funds from Oppenheimer Funds and Franklin Templeton are heavily invested in Puerto Rico. If these funds collapse, public sector retirees and employees from states that invested in them will suffer.
The triple-tax free 10% interest deal has drawn massive amounts of money from 401k's and other ordinary investment funds. These funds will all lose significant principal in a Puerto Rico default, which means that a lot of ordinary Americans will lose part or all of their savings.... NBC News (5-June) and The Nation (24-May)