The Street is abuzz with Greece’s crisis now. However, a similar crisis in Puerto Rico may also keep investors worried. A crumbling economy, massive public debt and an increasing government deficit have pushed Puerto Rico to the brink of default, and it wants the right to declare bankruptcy. Puerto Rico owes $73 billion it is unable to repay.
Governor Alejandro Padilla has stated that Puerto Rico is bankrupt and it is mathematically impossible for it to repay its creditors. Imposing sales taxes in 2006, retrenchment of public employees in 2009, pension reform in 2013, and the latest gas tax and the Sales and Use Tax (IVU) were some of the measures Puerto Rico had been trying to effectively use.
Unfortunately, it failed to restrict the country from amassing about $73 billion of debt, which translates into over $20,000 per person in Puerto Rico. This ironically is more than the median income of $19,520 per year.
What This Means to the US
Though located a thousand miles away from the continental US, Puerto Rico’s debt concern is now becoming a 2016 campaign issue. The larger concern for investors is the exposure to this island. More than 20% of bond mutual funds hold Puerto Rican bonds. Moody’s Investors Service has cut about $56 billion of Puerto Rico’s other bonds into the “junk” category. Also, escalating tensions should be indicative to let go of certain Puerto Rican stocks that investors might have in their portfolios.
In addition to the exposure, the Puerto Rico crisis may have a domino effect. It will most likely affect the benchmarks going forward more prominently than it has in recent days when everyone was busy reading about the Greek drama. According to Reuters, the White House “is not contemplating a federal bailout of Puerto Rico to help the island deal with its debt crisis.†Meanwhile, there is no economic growth in the island.
Puerto Rico is a US territory and is overseen by the US federal government. However, the island is not part of US economic statistics and GDP or employment data. It also does not share sovereignty. Nonetheless, the US has some cost burden in the form of aid and entitlement plans.
