Puerto Rico – Munis on the Brink

by Daniel Gould

Recent announcements about Puerto Rico’s runaway debt crisis have thrust the island territory’s long-running economic woes into the national spotlight. In late June, Governor Alejandro Padilla García warned that the U.S. commonwealth was alarmingly close to default on its $72 billion debt – far more per capita than any US state. Puerto Rico’s struggles result from a kind of ‘perfect storm’ of financial blows. A dismal job market (unemployment currently stands at 12%) spurred population decline as Puerto Ricans moved to the mainland for work. Faced with a shrinking tax base, inefficient administrations then spent years relying on lenders to pay for pensions, social services and other budgetary gaps. Now, investors from hedge funds to individual bondholders could be hit with potential losses.

The larger question for the US economy is whether Puerto Rico’s current drama could make investors more skittish about taking on municipal debt. In theory, such a shift could change the equation for state and local governments nationwide that rely on bond measures to fund everything from schools to sports arenas. Comparisons to Detroit are logical, but Puerto Rico’s unique commonwealth status excludes it from the Chapter 9 bankruptcy protection afforded to all 50 states. This leaves the territory with less room to maneuver, though it is reaching out to creditors and Washington to help coordinate a broad restructuring of its debts. No matter how the situation develops, we continue to watch Puerto Rico closely, keeping attuned to any potential fallout in US markets.

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