The Caribbean island of Puerto Rico is in the throes of a debt crisis that recently reached a breaking point when it missed a $422 million bond payment due May 2nd. When asked in a subsequent interview about the likelihood of making future payments on the remaining $72 billion of debt, Puerto Rican Governor Alejandro Garcia Padilla noted that the U.S. territory “does not anticipate having the money.”

Even a cursory review of Puerto Rico’s finances confirms Padilla’s claim of insolvency. The government is expecting deficits to grow from $14-$16 billion over the next five years, and for revenue to fall by $1.7 billion over that same five-year period. To makes matters worse the U.S. territory’s unemployment rate is a lofty 12.2 percent.

The problem is simple:  Puerto Rico’s debt burden is equal to over 100% of its GDP when including the $43 billion worth of unfunded pension liabilities. This situation is exacerbated by falling population growth and perpetually shrinking GDP.

This is an unsustainable burden for the Caribbean island that is home to 3.5 million residents. To put this in perspective, if Puerto Rico were a state it would be similar in size to Iowa, which carries a comparatively meager $15 billion in public debt and a debt to GDP ratio of just 11%. In fact, even big spending states such as New York only carry a debt to GDP burden that is just 25%. 

Puerto Rican debt has been the darling of Hedge Funds and financial advisors for years because of the desperate search for yield that has been exacerbated by the Fed’s ZIRP and by the government’s triple tax-free status of its bonds.

Sadly, this debt story has been told before. Politicians, lured by power, convince citizens that economic prosperity comes from debt-fueled government spending. But when the promised growth never materializes tax payers are saddled with debt payments that far transcend the tax base.

The Island’s coveted tax-exempt status, coupled with no requirements for a balanced budget, allowed Puerto Rico to ignore the fetters of typical state spending and encouraged them to follow the fiscal policy of Greece.