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Puerto Rico: The Next Detroit? (Downgraded and out of options)
FrontPage Mag ^ | 02/07/2014 | Arnold Ahlert

Posted on 02/07/2014 8:32:36 AM PST by SeekAndFind

On Tuesday, credit ratings agency Standard & Poor’s downgraded Puerto Rico’s general-obligation bonds to BB+, a level that is considered junk status. Similar action by rating agencies Moody’s and Fitch appears virtually certain, as the island territory copes with a staggering $70 billion of debt, all of which needs to be repaid with interest. Unfortunately, Puerto Rico has been in what amounts to a continuous recession since 2006, and its economy is currently shrinking at a 6 percent pace. The official unemployment rate is 14.7 percent, and its debt-to-GDP ratio is 93 percent.

Furthermore, the island is experiencing the largest population outflow since the 1950s, when 500,000 residents left for better job prospects on the U.S. mainland. Between, 2010 and 2012 the commonwealth lost 54,000 residents, and another 36,000 from July 1, 2012, to July 1, 2013. The percentage of decline is more than seven times the decline of second-ranked West Virginia.

Working-age Puerto Ricans who leave are being replaced largely by retirees highly unlikely to provide anything resembling the economic boost Puerto Rico so desperately needs. The vicious cycle has left the territory with a woeful workforce participation rate: only 41 percent of working age Puerto Ricans have a job or are looking for one.

Exacerbating this trend is the reality that only half of Puerto Ricans over age 25 have graduated from high school, and only twenty-five percent of those graduates earn a bachelor’s degree. The homicide rate is six times the nation average. Moreover, since the U.S. dollar is Puerto Rico’s currency, the option of devaluation as a means of making the island more attractive to outside investment remains off the table.

Puerto Rico’s troubles have unknown implications for the municipal bond market. According to the independent investment research firm Morningstar, the island territory’s debt is held by about 70 percent of U.S. municipal mutual funds. Those bonds have been attractive to many investors, as the yield on them have increased right along with the soaring debt that engendered that increase. Also their earnings remain free from state and federal taxes, and Puerto Rico’s constitution provides bondholders with strong guarantees that they would be paid off before pensioners and public workers if the government defaulted.

Nevertheless, high risk accompanies high interest rates, and as of now it appears that bondholders will be taking substantial losses.

Puerto Rican Gov. Alejandro Javier Garcia Padilla has been determined to restore growth, and ran on a platform of creating 50,000 jobs. Toward that end, his government is in the process of offering manufacturers tax incentives and electricity tax credits, with the latter effort aimed at enticing firms that might otherwise be dissuaded by the island’s sky high rates, which are double those on the mainland. Government officials are also making an effort to boost tourism, and they are currently searching for someone to handle a $300 million port project to handle larger ships that will be en route to an expanded Panama Canal.

Despite these efforts, Padilla’s top priority remains bringing the debt under control. He has continued the government job cuts begun by his predecessor, and the combined cuts have culled one-in-ten government jobs. Many of the remaining workers have been switched from traditional pensions to 401(k)s. Padilla also enacted a monumental tax increase of $1.3 billion, comprised of corporate taxes, sales taxes and a gross receipts tax.

The results have been fairly dramatic. The reforms have put the government on a path to possibly reduce 2013′s estimated $2.2 billion budget deficit this year, with the idea of eliminating budget deficits entirely by 2016.

Unfortunately, it may be too little too late. Government workers still comprise a quarter of the island’s workforce, compared to the U.S. average of 16 percent. Moreover, the government faces an additional $37 billion in unfunded pension obligations on top of the $70 billion in outstanding debt. This has led inexorably to the higher interest rates Puerto Rico must pay on its debt obligations, as the commonwealth continues to fund its day-to-day operations with borrowed money. “You cannot pay daily expenses with your credit card, and that’s what Puerto Rico has been doing for years,” said Deepak Lamba-Nieves, research director of the Center for a New Economy, a San Juan think tank. “We borrowed just to keep the lights on.”

That borrowing, a combination of bonds issued by the government and private corporations, including authorities for water and sewer, as well as highways and electric power, led to a tripling of Puerto Rico’s debt since 2000. Successive administrations on the island used the bond market to plug budget holes, a process that ramped into high gear during the economic slowdown. In 2006, deficits were exacerbated by the phasing out of a tax credit for manufacturers, and a housing bust that eliminated three of the island’s banks. That bust left many residents handling a personal debt crises similar to the one afflicting the government.

For many decades, a combination of low-cost labor and favorable tax laws had led many manufacturers to set up shop on the island, led by shoe factories and textile mills, and followed by drug manufacturers. The former group moved to more promising business locations, followed by the drug companies downsizing their output due a series of patent expirations. the one-two punch led to a precipitous decline in factory jobs from 160,000 to 75,000 since 1996.

As a result, more and more Puerto Ricans have come to rely on government for their survival, with a third of the population receiving food stamps. Residents are also twice as likely to receive Social Security disability benefits than their mainland counterparts.

The Standard & Poor downgrade reflects all of this depressing reality. ”Puerto Rico has limited liquidity without access to the debt market by either GDB (Government Development Bank) or directly by the Commonwealth for sizable amounts of debt,” the agency said. ”In our view, there is little margin for error over the next two years.” There was a smidgen of upbeat news as S&P recognized the government’s progress regarding spending cuts. ”We view the reform as significant and could contribute to a sustainable path to fiscal stability,” the agency said, explaining that was the reason the commonwealth didn’t get a lower rating.

Yet the future remains murky. “The full implications of this downgrade are a real unknown,” said Matt Fabian, managing director of Municipal Market Advisors, a firm that tracks the municipal bond market. “How will bondholders react?” he wondered.

It is more complicated than that. There is no chapter in the bankruptcy code that pertains to Puerto Rico, and absent that code it remains to be seen how a likely plethora of court cases revolving around sovereign immunity, and the contractual rights of bondholders, will be adjudicated. A bailout might help, but the U.S. government has already given Puerto Rico a back-door — and constitutionally dubious – bailout. The move, worth nearly $2 billion per year, was accomplished by allowing U.S. multinationals operating on the island to credit taxes paid to Puerto Rico on their federal tax bill. Yet it hasn’t done much to alter the island’s financial trajectory, and anything formal would likely be politically toxic for the same Obama administration that has allowed Detroit to endure the trials and tribulations of bankruptcy largely on its own.

The coming weeks will give a clearer indication of where Puerto Rico is ultimately headed. The government still needs to come to the bond market for financing on debt already accumulated. That would be a $3.7 trillion bond market already shaken by Detroit’s default.

Yet the government will push on. “While we are disappointed with Standard & Poor’s decision, we remain committed to the implementation of our fiscal and economic development plans, said Treasury Secretary Melba Acosta Febo and GDB president David H. Chafey, in a written statement. ”We believe the investment community will recognize the positive impact of the reforms that the Garcia Padilla Administration has enacted in due course.” Or, much like Detroit, the investment community might conclude additional financing no longer makes any sense. Only time will tell — but time is growing short.


TOPICS: Business/Economy; News/Current Events; US: Michigan
KEYWORDS: bankruptcy; detroit; puertorico

1 posted on 02/07/2014 8:32:36 AM PST by SeekAndFind
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To: SeekAndFind

But I hear the beaches and golf are better than Detroit’s.


2 posted on 02/07/2014 8:37:02 AM PST by BlueStateRightist (Government is best which governs least.)
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To: SeekAndFind

“O” will make them a state of the union... then WE can pick up the tab for them TOO.


3 posted on 02/07/2014 8:41:20 AM PST by SMARTY ("When you blame others, you give up your power to change." Robert Anthony)
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To: SeekAndFind

Puerto Rico has a much nicer climate and a more pleasant native culture.


4 posted on 02/07/2014 8:44:42 AM PST by Tax-chick (Tell the mad chameleon he's not welcome any more.)
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To: BlueStateRightist

PR is a beautiful but poor island.
Drugs from South America are not helping the situation.


5 posted on 02/07/2014 8:45:56 AM PST by Eric in the Ozarks ("Say Not the Struggle Naught Availeth.")
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To: Tax-chick; rrstar96; AuH2ORepublican; livius; adorno; wtc911; Willie Green; CGVet58; Clemenza; ...
Thank you for the kind remark, Tax-chick.

Puerto Rico Ping! Please Freepmail me if you want on or off the list.


6 posted on 02/07/2014 8:48:15 AM PST by cll (Serviam!)
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To: Eric in the Ozarks

Yes. I’ve been to PR a few times. But it suffers from comparatively high prices relative to other destinations in the Caribbean. The Dominican is a better deal, for example.


7 posted on 02/07/2014 8:49:20 AM PST by BlueStateRightist (Government is best which governs least.)
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To: SeekAndFind
¡Puerto Rico! ¡Independencia Hoy!
8 posted on 02/07/2014 8:50:05 AM PST by Paine in the Neck (Our Lives, our Fortunes, and our sacred Honor)
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To: BlueStateRightist

My travel agent recently booked me on a seven-night trip to Puerto Rico. No days, just seven nights in Puerto Rico.

I asked him, “What do I do during the day.”

He said, “I don’t care what you do, just stay out of Puerto Rico.”

-Rodney Dangerfield


9 posted on 02/07/2014 8:50:19 AM PST by dfwgator
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To: SeekAndFind

It takes a lot of effort and talent to create and maintain a First World civilization. No everyone can do it.


10 posted on 02/07/2014 8:50:59 AM PST by Count of Monte Fisto (The foundation of modern society is the denial of reality.)
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To: Count of Monte Fisto

I question how much longer we’ll be able to do it.


11 posted on 02/07/2014 8:51:27 AM PST by dfwgator
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To: BlueStateRightist
We rented a beach front house for 10 days over Christmas, 2012. It was about an hour's drive from San Juan.
Druggies were parked on the street in front of our place. We found syringes on the blacktop after they drove away.
12 posted on 02/07/2014 8:52:48 AM PST by Eric in the Ozarks ("Say Not the Struggle Naught Availeth.")
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To: cll

You’re welcome. I have several close friends from Puerto Rico. Most of them visit there at least annually. One tried to sell me her house in PR, but it wasn’t nearly big enough for my family to vacation there!


13 posted on 02/07/2014 8:54:31 AM PST by Tax-chick (Tell the mad chameleon he's not welcome any more.)
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To: SeekAndFind

Yeah,
So let’s make this basket case the next State?
Then maybe Haiti?
And maybe any other total financial basket cases.


14 posted on 02/07/2014 9:30:47 AM PST by Joe Boucher ((FUBO) obammy lied and lied and lied)
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To: Tax-chick

It’s beautiful and the people are wonderful.


15 posted on 02/07/2014 9:33:03 AM PST by trisham (Zen is not easy. It takes effort to attain nothingness. And then what do you have? Bupkis.)
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To: trisham

I was stationed at Vieques in the late 50’s. As told, it was beautiful, loved the people, great bars, great music, but killer mosquitoes. Semper Fi


16 posted on 02/07/2014 9:49:19 AM PST by gunner03
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To: gunner03

Thanks, gunner. :)


17 posted on 02/07/2014 9:50:42 AM PST by trisham (Zen is not easy. It takes effort to attain nothingness. And then what do you have? Bupkis.)
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To: trisham

They had a free market minded Governor in Luis Fortuno who had turned the tide in Puerto Rico. It took some serious belt tightening, but it was working. Of course, they voted out, so too friggin bad on them.


18 posted on 02/07/2014 9:58:59 AM PST by cumbo78
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To: dfwgator

We can rebuild our civilization. We just have to throw off the people that are holding us back.


19 posted on 02/07/2014 10:00:38 AM PST by Count of Monte Fisto (The foundation of modern society is the denial of reality.)
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To: BlueStateRightist

Detroit has awesome beaches...they’re walking right down Eight Mile...I occasionally see them from my office window.

Oh wait, you said BEACHES, not bitch#s. Nevermind.


20 posted on 02/07/2014 10:20:56 AM PST by Mich Patriot (PITCH BLACK is the new "transparent")
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To: SeekAndFind
"Puerto Rico: The Next Detroit? (Downgraded and out of options)"

Don't they have some car rims lying around they can fence?

21 posted on 02/07/2014 10:23:12 AM PST by Mich Patriot (PITCH BLACK is the new "transparent")
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To: SeekAndFind

Used to spend time in Puerto Rico on business many years ago. Outside of the tourist trap area in San Juan and some beach resorts, the island was dirt poor. Great weather, nice people, and pineapples picked ripe (so much better than available here) are my main memories, but abject poverty was everywhere. Companies built product in PR back in the day because of tax breaks and relatively low wages, wonder how many are still there.


22 posted on 02/07/2014 6:45:05 PM PST by Some Fat Guy in L.A. (Still bitterly clinging to rational thought despite it's unfashionability)
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To: SeekAndFind

Import the Third World, become the Third World. Time for us to cut Puerto Rico loose, curtail all Third World immigration, and end the infestation.


23 posted on 02/08/2014 5:28:43 PM PST by Clemenza (Lurking)
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To: trisham

Beautiful Third World WELFARE DEPENDANTS. If only we could deport the mongreloid butts of the descendants here on the mainland, who remain a drain on our nation like every other group of third world immigrants.


24 posted on 02/08/2014 5:32:32 PM PST by Clemenza (Lurking)
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To: Tax-chick

PRs are a Third World people, the majority of whom use the WIC card to buy groceries. Time to cut them off.


25 posted on 02/08/2014 5:34:40 PM PST by Clemenza (Lurking)
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To: Clemenza

The people I met were employed. They were not on welfare.


26 posted on 02/08/2014 5:57:23 PM PST by trisham (Zen is not easy. It takes effort to attain nothingness. And then what do you have? Bupkis.)
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To: trisham
Check some statistics: the majority of the populatin uses the WIC card and the majority of the island's economy isvdependnt on Uncle Sugar one way or another.

We should no longer tolerate a Third World island as part of our Republic. Cut them off.

27 posted on 02/08/2014 6:06:12 PM PST by Clemenza (Lurking)
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To: Clemenza

Perhaps you might consider reading my original post.


28 posted on 02/08/2014 6:08:12 PM PST by trisham (Zen is not easy. It takes effort to attain nothingness. And then what do you have? Bupkis.)
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