Puerto Rico Defaults on $422 Million Bond Payment, Triggering Largest Municipal Debt Crisis in U.S. History

Governor Alejandro García Padilla ordered Puerto Rico’s first major default, blocking a $422 million payment on Government Development Bank bonds. This historic default was part of Puerto Rico’s unprecedented $72 billion debt crisis, representing debt larger than the island’s GDP. On June 28, 2015, Governor Padilla had publicly declared the debt ‘unpayable,’ warning of a ‘death spiral’ if the economy couldn’t grow. In April 2016, Padilla signed emergency legislation authorizing suspension of debt payments, setting up a confrontation with hedge fund creditors who had been demanding severe austerity measures. A report commissioned by 34 hedge funds holding $5.2 billion in Puerto Rico bonds recommended harsh spending cuts including teacher layoffs, school closures, and health benefit reductions—despite Puerto Rico having already closed 100 schools in 2015 alone and facing nearly 50% poverty rates by 2016. The default led to the May 2016 GDB bond default and the June 29, 2016 suspension of $780 million in general obligation payments—the first defaults on constitutionally protected Commonwealth debt. This crisis created the conditions for PROMESA legislation and the imposition of an unelected federal fiscal control board. By May 2017, Puerto Rico’s combined debt reached $123 billion including unfunded pension liabilities, making it the largest public sector bankruptcy in American history. The debt crisis was decades in the making, driven by colonial economic policies, tax incentives that enriched corporations while draining local revenues, Wall Street bond sales with predatory terms, and systematic looting by financial firms that would later position themselves as ‘saviors’ offering consulting contracts worth hundreds of millions.