Last week, Puerto Rico managed to overtake Detroit’s 2013 bankruptcy as the biggest public-sector monetary meltdown in U.S history.
In fact, Detroit’s situation pales in comparison: As a U.S. territory, Puerto Rico’s population is five-times larger than Detroit’s and there’s a ton more debt involved.
And we’re not talking nickels and dimes either: Puerto Rico has amassed a staggering $74 billion in debt, with underfunded pension liabilities estimated at $45 billion.
That equates to around $34,000 for every man, woman and child on the island.
Here’s a short list of factors contributing to Puerto Rico’s debt debacle …
- Shrinking tax base from exodus of educated class.
- Borrowing to balance the budget.
- Big government employs 25% of the island’s workers versus the average 17% in U.S. states.
Plus, capital inflows into Puerto Rico – that would have provided the government and investors hope for an economic revival – never came. And reckless spending in recent years made matters even worse.
And when it comes to bankruptcy, government officials are rewriting the script on how it should proceed, bringing about a host of sticking points to be contested. Consider …
Sticking Point #1: Puerto Rico’s bankruptcy oversight board allocated only $800 million per year in debt service, far short of the roughly $3.5 billion coming due each year.
Sticking Point #2: The territory’s constitutional guarantee that “all available resources” will be used to pay back general obligation bondholders first is in jeopardy with new bankruptcy proceedings.
Sticking Point #3: Creditors question the fairness of 2016 law (PROMESA), which was enacted by the U.S. to provide oversight during Puerto Rico’s debt-restructuring process.
So, not only does Puerto Rico have a ton of debt, its bankruptcy proceedings are likely to be lengthy and complicated. And that means even more economic uncertainty and larger haircuts for the territory’s bond holders and other debtors.
And don’t underestimate the instability these shenanigans will do to bond market confidence in the United States, especially for state and local governments saddled with unsustainable debt and pension liabilities.
But as some politicians quip: Never let a good crisis go to waste. This is no different.
As it stands, roughly $12 billion of Puerto Rico’s outstanding debt is insured. And this means that insurers will cover interest and maturity payments when local governments fail to pay. That tells me that an emerging short candidate is one of the largest insurers involved: Ambac Financial Group (AMBC), which guarantees $8 billion in sales-tax bonds maturing decades from now.