Puerto Rico: Greece on the Caribbean

By Business Leaders FOXBusiness


While investors anxiously watch Greece, another debt time bomb is ticking in Puerto Rico as the country scrambles to meet its obligations.  The island commonwealth owes $72 billion in total public debt.

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Between June 30th and July 3rd the government has to pay close to $2 billion to avoid default on various general obligation bonds, guaranteed debt obligations and other debt like $415 million in electric utility debt.

Joseph Rosenblum, Director of Municipal Credit Research at Alliance Bernstein (AB) says, “We think there is a good probability of a restructuring and if it doesn’t occur now we think the budget challenges going forward will continue to place stress on their ability to honor their debt obligations.”

The government of Puerto Rico has been setting money aside to cover the upcoming payments but has very little money left over to meet future obligations or to cover its daily expenses. On Wednesday June 24th Puerto Rico’s Resident Commissioner and representative in Congress Pedro Pierluisi testified before a congressional hearing that the US government needs to either help Puerto Rico, grant it statehood, or grant it independence so it may get its finances in order.

He said, “Territory status is a significant reason why Puerto Rico has excessive debt and the sole reason why it lacks a critical tool to manage that debt.”

Bankruptcy is the tool Puerto Rico lacks but the commonwealth could decide to withhold the upcoming payments in order to conserve cash and force a restructuring according to AB’s Rosenblum.

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“It’s not unlike what New York City saw back in the 1970s when they declared a moratorium on their debt but in the interim the state government stepped in and you had a higher unit of government push the process,” he said.

But there’s little chance any restructuring would be a clean or smooth process since Puerto Rico is a commonwealth. New York City in the 1970s  had the state of New York to help it restructure but whether the Federal Government would help Puerto Rico restructure its debt is unknown.

Rosenblum says, “That makes it interesting. The US government seems to be reluctant to get involved.”

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