Global markets are now preoccupied with Greece's debt disaster, but Puerto Rico's debt woes—it's on the hook for $72 billion—pose a bigger threat for U.S. investors, writes Ellie
Ismailidou of MarketWatch.
Puerto Rico has announced that it can't pay back its debt on current terms, and as a U.S. territory, its government bonds are U.S. municipal bonds.
And therein lies the problem. While American investors own the vast majority of Puerto Rico's debt, only $14 billion of Greece's $350 billion debt is owed to U.S. banks, Ismailidou explains.
"Exact numbers are hard to come across, because hedge funds do not have the same disclosure obligations as traditional muni-bond owners," Daniel Hanson, an analyst at Height Securities told her.
"But according to most recent estimates about 60 percent of the island’s bonds are owned by traditional municipal bond investors and the rest is in the hands of hedge funds and other crossover investors." Traditional investors means individuals like you and I.
The Puerto Rican crisis hits a muni bond market already roiled by the financial difficulties of many cities and states, including Illinois and New York. Recall that Detroit filed for bankruptcy in 2013.
"[Puerto Rico] is close to home and getting messy," Peter Tchir of Brean Capital wrote in a commentary obtained by TheStreet.com contributor Simon Constable.
"We, or at least me, weren't focused on a problem much closer to home, with much larger P&L [profit and loss] ramifications" than Greece.
The price plunge of Puerto Rican bonds this week shows that many investors think the island government will default, David Hammer, a PIMCO municipal bond portfolio manager, told Constable.
And he says Puerto Rico is on the hook for much more than $72 billion. When you add unfunded pension liabilities and expected health-care liabilities, it tops the $100 billion mark, Hammer said. "We've been looking at Puerto Rico's debt load as unsustainable for quite some time." Investors started fleeing Puerto Rican munis big-time in late 2013.
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