The huge municipal debt crisis in the United States is making its way back on the radar because of Puerto Rico’s recent default.
It was projected to be one of the largest threats to the U.S. economy from 2011 to 2013.
Growing expenditures, declining revenues, and large existing debt to service during a weak economic recovery led many to be believe that city, county, and state governments would declare bankruptcy in droves.
But weak economic growth turned into modest economic growth. That bought some time and the municipal debt crisis never came to fruition.
However, the number of defaults have gone up and there were several high profile bankruptcies in the meantime: $18 billion from Detroit in 2013, $4 billion from Jefferson County in Alabama in 2011, $1 billion from Stockton, Calif., in 2012, and $500 million from San Bernardino, Calif., in 2012.
But their bankruptcies were mostly orderly and the potential contagion did not spread.
Puerto Rico’s debt crisis is in another league. It owes $72 billion. That is $20,300 for every man, woman, and child. Raising taxes and cutting expenses will narrow the gap, but given declining revenues, a dismal economy, and an exodus of working age citizens, fiscal policy will not be enough.
As a result, Puerto Rico is trying to get its creditors to share in the pain by restructuring the debt, postponing payments or even debt forgiveness.
Until there are alternative solutions to their debt crisis, the only option left is default.
Puerto Rico’s Government Development Bank paid only $628,000 of the $58 million due to creditors in early August.
Investors and policymakers have shrugged off Puerto Rico because its unique problems are due to issues of being a U.S. territory. Unlike Detroit, by law, Puerto Rico cannot declare bankruptcy.
And unlike Greece, the United States has said that it will not provide a bail out like the IMF and EU central banks did for Greece.
But what many ignore is that modest economic growth in the U.S. and around the world is slowing down. That puts downward pressure on municipal revenues and upward pressure on municipal expenses.
And with the Fed likely to raise interest rates soon, that will increase the cost of future debt service.
And if that were not enough, state pension plans are underfunded by $4.7 trillion.
This combination will likely wreck havoc on more city, county, and state budgets and bring back the risk of the once quiet municipal debt crisis.
© 2021 Newsmax Finance. All rights reserved.