Tags: public | debt | Congress | Puerto Rico

NY Times: Puerto Rico's Heavy Public Debt Is In Uncharted Waters

By John Morgan   |   Tuesday, 08 Oct 2013 02:21 PM

A crisis is brewing with Puerto Rico’s public debt, which is much larger than Detroit’s, and the island territory could require federal help that would put the solution in an uncharted legal area, The New York Times reported.

Puerto Rico has about $87 billion of debt, including pensions, which works out to $23,000 per capita. But territories, like states, have no right to declare bankruptcy.

The Times said Puerto Rico has been “effectively shut out” of the bond market and has resorted to bank credit and other measures that are “unsustainable in the long run.”

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In Puerto Rico, the bulk of the debt is owed to investors. Mutual funds have been particularly attentive buyers of the island’s bonds because, as a territory, Puerto Rico can sell bonds that pay tax-exempt interest in all 50 states.

The Times said the bonds pay higher interest because the territory’s credit rating is relatively low. Some have been insured against default, and the territory’s constitution gives them first priority in the event of creditor calls.

But the bonds have been issued on shakier ground in recent years.

“In each of the last six years, Puerto Rico sold hundreds of millions of dollars of new bonds just to meet payments on its older, outstanding bonds, a red flag,” the Times reported. “It also sold $2.5 billion worth of bonds to raise cash for its troubled pension system, a risky practice, and it sold still more long-term bonds to cover its yearly budget deficits.”

The Times reported that in a meeting with bond analysts in New York this week, Puerto Rican Senate President Eduardo Bhatia said the U.S. Treasury and White House would like to help.

“We are waiting for some sort of an announcement from the Treasury and the White House,” he said without explanation.

Puerto Rican government officials have been visiting New York and Washington, D.C. in recent weeks to meet with bankers, credit analysts, members of Congress and others, and the territory has recently imposed austerity measures, the Times reported.

The newspaper said Puerto Rico may need some form of sovereign debt relief, which would be subject to approval by Congress at a time when the government is shut down and an existing national budget crisis is paramount, or Congress may need to impose financial control over the island.

Bloomberg News described Puerto Rico’s bond problem as the “perfect debt storm” and said the territory is the worst performer in municipal debt markets in 2013 to date.

The Wall Street Journal reported one senior Obama administration official said the White House is coordinating with federal agencies "to make sure that federal resources are fully utilized for maximum impact for the people of Puerto Rico."

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