Ten years ago, Puerto Rican municipal bonds were cheap, easy to purchase, and tax-free. Now, U.S. investors may face the consequences of purchasing Puerto Rican debt, realizing that the territory may not be able to pay. Puerto Rico’s sluggish economy, combined with rapid emigration, has reduced the tax revenue. As a result, the territory has the highest per capita debt of all U.S. states without the necessary means to pay investors.
The Puerto Rican debt crisis has much greater implications for domestic markets than Greece. Unlike Detroit, Puerto Rico’s government and public corporations cannot file for Chapter 9 bankruptcy. Governor Padilla hopes to postpone debt payments; however, many question what would stimulate economic growth in the territory. To make matters worse, Puerto Rican muni-bonds trade in the U.S. markets, unlike Greek debt that is “in the hands of the IMF”. Of the $350bn in Greek debt, only $14bn is owed to U.S. banks. Meanwhile, much of Puerto Rico’s $72bn debt is owed to traditional muni-bond investors (Hedge funds and crossover investors holding the remainder).
In some respects, the Puerto Rican debt crisis is very similar to Greece. It has an overwhelming debt burden and has limited means to pay off the debt. Still, the holders of Puerto Rico’s municipal bonds are U.S. Investors, and the domestic markets will feel the brunt of the crisis.