Thursday , 23 May 2024

Puerto Rico is “America’s Greece” – Here’s Why

Puerto Rico is just the tip of the iceberg of the coming debt crisis in the western hemisphere as Greece is just the tip of the iceberg of the coming debt crisis in Europe and that is why Puerto Rico is called “America’s Greece”. 

In Puerto Rico today,

  • more than 40% of the population is living in poverty,
  • the unemployment rate is over 12%, and
  • the economy of the small island nation has continually been in recession since 2006…
…yet all this time Puerto Rico has continued to pile up even more debt.  Finally, it has gotten to the point where all of this debt is simply unpayable.
The above edited excerpts (and the copy below) comes from an article* by Michael Snyder ( originally entitled Why The Puerto Rico Debt Crisis Is Such A Huge Threat To The U.S. Financial System which can be read in its entirety HERE.
Puerto Rico's Debts Are
[From*: “Puerto Rico, as you can see in the above chart published by the WSJ, has been in a tricky situation for some time. It’s $72 billion of debt for an island of roughly 3.5 million is equal to 70% of economic output. This is a ratio that is at least three times higher than the next highest state or territory in the United States.
The territory, which was ceded to the United States after the Spanish-American War, has been in trouble for awhile. The population growth rate has slowed, emigration is at record levels, and per-capita GDP has dropped over the last decade. Puerto Rico has relied on debt to try to grow the economy, and now credit-rating companies expect the first default to occur this week from the island’s electricity provider, which borrowed $9 billion. Further, the territory has been issuing new debt to pay old debt, and now the government is expected to run out of cash in July.”]
Yes, the Greek debt crisis is larger, as Greece currently owes about $350 billion to the rest of the planet, but only about $14 billion of its total debt (i.e. 4%) is owed to U.S. financial institutions. With Puerto Rico, things are very different, however.
  • Just about the entire 73 billion dollar debt is owed to U.S. financial institutions. According to USA Today, there are 180 mutual funds that have “at least 5% of their portfolios in Puerto Rico bonds” because income from said bonds is exempt from state and federal taxation, making them very attractive to many U.S. investors.
  • Many of these financial institutions are very highly leveraged, however, so just a “couple of percentage points” could mean the different between life and death for some of these firms.
  • Unlike what is happening with Greece, the private financial institutions that hold Puerto Rican bonds are not likely to be very eager to “negotiate”.
  • Puerto Rico simply does not have the money to meet all of their debt obligations so somebody is not going to get paid at some point.
  • When that happens, those that insure Puerto Rican bonds – bondholders who are in the funds which hold Puerto Rican bonds and, more importantly, those who insure them in the derivatives market – are also going to take tremendous losses.
  • When Puerto Rico defaults, bond insurers are going to be expected to step up and make huge debt service payments to investors but this just might bankrupt some of these big bond insurers.

Puerto Rico is just the tip of the iceberg of the coming debt crisis in the western hemisphere as Greece is just the tip of the iceberg of the coming debt crisis in Europe.



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