Normally a story such as this winds up being about Detroit or Chicago or some other major US city because we’re talking about an economy on the brink of collapse. But this time it’s Puerto Rico. The Washington Post is reporting that the commonwealth is sitting on more than $70B in debt with a massive bond load and it currently will not be able to meet its obligations.
The governor of Puerto Rico has decided that the island cannot pay back more than $70 billion in debt, setting up an unprecedented financial crisis that could rock the municipal bond market and lead to higher borrowing costs for governments across the United States.
Puerto Rico’s move could roil financial markets already dealing with the turmoil of the renewed debt crisis in Greece. It also raises questions about the once-staid municipal bond market, which states and cities count on to pay upfront costs for public improvements such as roads, parks and hospitals.
For many years, those bonds were considered safe investments — but those assumptions have been shifting in recent years as a small but steady string of U.S. municipalities, including Detroit, as well as Stockton and Vallejo in California, have tumbled into bankruptcy.
Unfortunately for them, unlike cities, Puerto Rico is treated like a state and can not file for bankruptcy protection. They are sitting on a huge amount of bonds while their credit status has already effectively reached junk level. But this apparently didn’t come as any surprise on Wall Street since there have been reports of their increasingly tenuous financial position for several years now.
“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.”
Puerto Rico’s expansive web of debt includes standard government bonds as well as those floated by public corporations, including authorities for water and sewer, highways and electric power. Together, those bills have nearly tripled since 2000, as successive administrations turned to the bond market to plug gaping budget deficits. In addition to the $70 billion in government debt, the government also faces $37 billion in unfunded pension obligations, according to Morningstar.
That last item on the laundry list probably sounds familiar to most readers who have been following similar stories in American cities for several years now. Of that massive $70B in debt, more than half – $37B – is composed of unfunded pension payments which are coming due. I’m sure that Chris Christie could relate, as can Rahm Emanual. Of course, all of this puts the Governor, Alejandro Garcia Padilla, in a ticklish situation. He’s been in office since 2013 and he was elected on a promise to straighten this mess out. Their government has a constitutional requirement to pay off their bonds and other debt before anything else, including the public workers’ pensions. But Puerto Rico has depended heavily on tourism which took a hit during the recession and their citizens are free to move back and forth to the mainland as they wish. And they have. In droves.
Garcia Padilla has been a big favorite among Democrats and has even been mentioned as a possible Veep pick for Hillary Clinton. (Which came as a surprise to a lot of folks who didn’t know that Puerto Rico residents could run for President, I’m sure.) But just fitting a good demographic profile isn’t enough to win an election if your record is abysmal, and whether it’s his fault or not the Governor will have to answer for the commonwealth’s dismal fiscal situation.
So how does Puerto Rico get bailed out if they can’t pay the bills? If bankruptcy is off the table is it up to Washington to figure out a way to finance this? I can’t imagine that being terribly popular at the ballot box. Exit question: would you support such a bailout if it were even possible? And if not, what else do we do?