Actually curious on this, my knowledge of financial theory is sorely lacking. To my understanding, states can (and do) issue debt through municipal bonds. Is this one of those “exceptions and loopholes”? My understanding of the Puerto Rican debt crisis is that their bonds were made more attractive because income from their bonds is tax exempt by federal law from most US income taxes. By (artificially) increasing the attractiveness of those bonds PR was able to borrow more money than they would otherwise.