In the Northern Mariana Islands, the depleted public pension fund was wreaking such fiscal havoc in 2012 that the territory declared it bankrupt, but the case was thrown out. The government then tried cutting all retirees pensions 25 percent, but the retirees have been fighting the cuts, and the fund is nearly exhausted anyway.

Even Guam, which enjoys the economic benefit of several large American military installations, has been having qualms about its debt after Puerto Ricos default.

Puerto Ricos troubles provide a teachable moment for Guam, said Benjamin Cruz, the speaker of the legislature, who recently helped defeat a proposal to borrow $75 million to pay tax refunds. Spending borrowed money is too easy.

But the debt dilemma is now most acute in the Virgin Islands the three main islands are St. Thomas, St. Croix and St. John where the government has been struggling ever since a giant refinery closed in 2012, wiping out the territorys biggest nongovernment employer and a mainstay of its tax base.

Its troubles began to snowball last July, when Puerto Rico defaulted on most of its debts.

In August, Fitch downgraded the Virgin Islands debt to junk, citing the territorys chronic budget deficits and habit of borrowing to plug the holes, like Puerto Rico.

More downgrades followed, and in December, Standard & Poors dealt the territory a rare superdowngrade seven notches in one fell swoop leaving it squarely in the junk-bond realm. That scared away investors and forced it to cancel a planned bond offering in January.

The failed bond deal meant there was not enough cash to pay for basic government operations in February or March. As a stopgap, the territory diverted its workers pension contributions.

The Virgin Islands governor, Kenneth E. Mapp, said he had no intention of defaulting on any bonds.

I didnt ask anybody for debt relief, so dont put me in the debt-relief boat, Mr. Mapp said in an interview at Government House, the ornate seat of the territorial government, perched on a hillside overlooking the lush palms and bougainvillea of the capital, Charlotte Amalie, on St. Thomas.

Still, Mr. Mapp is contending with many of the same problems that proved too much for Puerto Rico, driving it in May to seek bankruptcylike protection under a new law for insolvent territories, known as Promesa. Puerto Rico is now embroiled in heated negotiations over how to reduce its roughly $123 billion in debts and unfunded pensions.

When Congress drafted the Promesa law last year, it made it possible for the other American territories to seek the same kind of help.

Now, even though the Virgin Islands maintains it has no intention of defaulting on its debts and has even given creditors new protections the mere prospect of bankruptcy has spooked the markets, putting borrowed money beyond the territorys reach and greatly limiting its options.

In something of a self-fulfilling prophecy, by giving territories the option to declare bankruptcy, Congress seems to have made such an outcome more likely.

That innocuous provision, when sent to the bond market, said, Heres an escape valve for your debt obligations, Mr. Mapp said. That changed the whole paradigm.

The problem is that in Puerto Rico, Promesa is turning out to shred the many legal mechanisms that governmental borrowers use to make their debts secure. These include liens and allowing creditors access to the courts.

Under Promesa, all the security structures are dissolving, Mr. Fabian said.

Investors who thought they were secured creditors before now find themselves holding moral obligation pledges, which are not enforceable.

After the Virgin Islands bond offer fell through in January, the fuel supplier to its electric authority stopped shipments, saying it had not been paid; the authority was already in court with its previous fuel supplier, which had not been paid either.

Then came the House of Representatives plan to repeal and replace the Affordable Care Act. Mr. Mapp saw the federal money that the Virgin Islands relies on for its public hospitals going up in smoke.

Mr. Mapp scrambled. He reactivated a five-year economic plan that had been languishing and pushed higher taxes on alcohol, cigarettes and soft drinks through the legislature. He fought for a permanent electric rate increase. He got $18 million in new federal funds for health care. He struck a deal to tax Airbnb rentals.

He hired collection agents to go after delinquent property and income taxes. He scheduled auctions for delinquent properties. He hired a team to work on the pension system, which is in severe distress, with only about six years worth of assets left.

Until recently, the pension system was chasing high returns by investing in high-risk assets, like a $50 million placement in life viaticals an insurance play that is, in effect, a bet that a selected group of elderly people will die soon. It also made loans to an insolvent inter-island airline, a resort that went bankrupt, and a major franchisee of KFC restaurants. The territorys inspector general has declared the loans illegal.

Link:

After Puerto Rico's Debt Crisis, Worries Shift to Virgin Islands - New York Times