Problems with Puerto Rican Debt Cause Mass Exodus, Exacerbate Problems
Please note that we are not authorised to provide any investment advice. The content on this page is for information purposes only.
Puerto Rico, a Spanish-speaking US territorial island in the Caribbean has an unusual dilemma. Its economy has performed remarkably poorly, causing Puerto Rican citizens to leave the country to seek better opportunities. Yet, those very same movements off the island reduce the territory’s tax base, worsening its debt problems.
As a result, Puerto Rico finds itself is on the brink of default, with its own population contributing to the problem by leaving. For years, the Puerto Rican economy has deteriorated. Much of the problem flows from poor debt management.
Puerto Rico, a Spanish-speaking US territorial island in the Caribbean has an unusual dilemma. Its economy has performed remarkably poorly, causing Puerto Rican citizens to leave the country to seek better opportunities. Yet, those very same movements off the island reduce the territory’s tax base, worsening its debt problems.
As a result, Puerto Rico finds itself is on the brink of default, with its own population contributing to the problem by leaving. For years, the Puerto Rican economy has deteriorated. Much of the problem flows from poor debt management.
In total, the Puerto Rican government owes a reported $73 billion in debt. Unfortunately, thanks to poor borrowing policies and the population’s mass exodus, there is a significant possibility that the government could default during the summer of 2015, as a $400 million dollar payment for the local energy provider comes due in July.
As described in a report by CNN, Puerto Rico has levels of debt close to those of a state like New York, but with a population closer to the much less populous Connecticut. That population provides the source of revenue for the Puerto Rican government via taxes. Yet, that tax base is quickly contracting as the residents depart in search of more stable economic conditions on the US mainland.
Puerto Rico’s debt problem is one it brought upon itself. In order to pay for debts that were coming due, the government fell into a habit of simply issuing more debt to pay off prior obligations. Much of this debt relates to Puerto Rico’s high energy costs, as the Caribbean Island derives most of its power from oil as opposed to the less expensive natural gas and renewable energy used elsewhere in the region.
On July 1, 2015, Puerto Rico must make a payment on behalf of the government-run power provider, PREPA, in the sum of $400 million. Most analysts consider it highly unlikely that the government will have enough cash available to make such a payment, and it does not appear likely that issuing more debt will raise the funds in time. In total, PREPA has about $9 billion in debt ($2 billion more than Detroit had when it declared bankruptcy).
In response to its looming default, Moody’s has downgraded Puerto Rican bonds to its lowest category of junk status. This will almost uncertainly prevent any effort by the government to raise the funds through the sale of more debt.
The possible default puts the government in a difficult conflict of interests. It must decide whether to honor its debts at the expense of its population, or provide for its people by defaulting on its financial obligations.
