Moody's Slices Puerto Rico Debt to Junk, Follows S&P

By Dunstan Prial Politics FOXBusiness

A schoolteacher demonstrates outside of the Capitol building as the Lower House of Congress voted to approve modifications to the Teacher's Pension System in San Juan, December 21, 2013. Puerto Rico, with an economy in or near recession for the last ... eight years, has chronic budget shortfalls and has spawned worry among investors in the $3.7 trillion municipal debt market, where its bond prices have plunged this year. Picture taken December 21, 2013. REUTERS/Alvin Baez (PUERTO RICO - Tags: EDUCATION POLITICS BUSINESS EMPLOYMENT) - RTX16RDT (Reuters)

Moody’s Investors Service on Friday cut Puerto Rico’s credit rating to junk status, two days after Standard & Poor’s made the same call on the troubled Caribbean island.

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Moody’s said in a statement announcing the downgrade that the commonwealth’s credit profile “is no longer consistent with investment grade characteristics.”

Puerto Rico’s general obligation rating was downgraded to Ba2 from Baa3 and the credit outlook rated negative.

Puerto Rico is a self-governing commonwealth of about 3.7 million people. The island’s economy has been shrinking in recent years even as government liabilities have increased, primarily pensions for government workers. Unemployment after years of recession hovers at around 15%.

“The problems that confront the commonwealth are many years in the making, and include years of deficit financing, pension underfunding, and budgetary imbalance, along with seven years of economic recession,” Moody’s said.

These headwinds have left Puerto Rico with a heavy debt load and high fixed expenses, “narrow” liquidity, and with limited access to capital markets.

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Moody’s said “aggressive actions” taken by Puerto Rico’s government to control spending, reform its pension system, scale back on debt and promote economic development weren’t enough to prevent the downgrade.

“While some economic indicators point to a preliminary stabilization, we do not see evidence of economic growth sufficient to reverse the commonwealth's negative financial trends. Without an economic revival, the commonwealth will face difficult decisions in coming years, as its debt and pension costs rise. The negative outlook signals the remaining challenges facing the commonwealth,” Moody’s said.

Fitch Ratings is the only one of the big three firms that hasn’t downgraded Puerto Rico. Fitch has the commonwealth on watch for a cut, however.

Unlike Detroit, which is a U.S. municipality, Puerto Rico is a territory and does not have the option of filing for a debt restructuring under a bankruptcy filing.

Moody’s cited as a credit strength Puerto Rico’s close political and economic relationship with the U.S. However, the island’s main challenges stem from a long-term decline in its manufacturing sector and “very large unfunded pension liabilities, and “very high government debt.”