Puerto Rico’s Staggering Bankruptcy

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.

Terrible!

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.

Detroit suffered through the worst governmental economic failure in American history — until that bankruptcy was surpassed by Puerto Rico’s money meltdown.

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.

Good investing,

Mike Burnick

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Comments 14

  1. David B. Renaud May 10, 2017

    Whistle on puerto rico, they don’t care about us, why should we care about them. We have our own problems……

    Reply

  2. Marlene Hessler May 10, 2017

    Looks like everybody else gets the shaft. Puerto Rico politicians made out like bandits. Maybe the taxpayers even got some benefits from all the money dumped there via bond sales. Now, it’s time to pay the pipers and the money turned to pee.

    Reply

  3. Steve Toldi May 10, 2017

    The problems are endless no end insite !!

    Reply

  4. Alen May 10, 2017

    ABSOLUTELY….Under NO circumstance should WE the people of the United States through our taxes FUND these deadbeat CROOKS from a NON-STATE with A DIME!!!!!!!!!!!!!!!!!!!!!! Let their lousy, thieving, Socialist agenda fend for itself!!

    Reply

    • antonio gonzalez May 10, 2017

      YOU ARE RESPONSIBLE FOR YOUR STEPCHILDREN WRONGDOINGS BECAUSE YOU DIDN’T GAVE GOOD SUPERVISION, BECAUSE YOUR CONGRESSMEN FRIENDS WERE GETTING 20 BILLION PROFIT YEARLY FROM THIS ISLAND

      Reply

      • Calvin Cassady May 14, 2017

        Exactly. Not only that but a large part of their financial problems are due to their status as a non-stop but with tacit put status from the US Gov. The least we can do is get rid of the Jones Act trading requirements, obviously a vestage of colonialism.

        Reply

  5. anthony barbuto May 10, 2017

    it is interesting…..Liberals complained that western countries were taking advantage of indigenous peoples. After the colonial powers left the countries…..the local politicos and gangsters raped and pillaged their own people. We see this in S America, Asia, Africa and now Puerto Rico. I say let them solve ( or try to solve) their own problems. The US is BROKE with a $20 trillion dollar debt. Once the worlds countries realize this and dump the dollar, as they are doing now for the IMFs currency….the US won’t be able to bail out a row boat, much less bail out Puerto Rico….The horse has left the barn….might as well close the barn door because there is not going to be another horse….to fill the stall…Casey Stengle, the old baseball mgr said..” it aint over…..till its over”…..well, boys and girls,….America, the last great experiment in gov’t…….is over,…… and the experiment………. failed….

    Reply

    • tillamooktim May 12, 2017

      Right on Anthony! I’ve called this out hundreds of times but to no avail.

      Reply

  6. Willie Smith May 10, 2017

    That’s the price we pay for not giving them their independence decades ago! So dump them now? No, send all the working, educated Puerto Ricans in the US home to straighten things out!

    Reply

  7. antonio gonzalez May 10, 2017

    YOU FORGOT TO INVESTIGATE AND COMMENT THE ROLE OF GOVERNMENT OFFICIALS AND OFFICIALS OF FINANCIAL INSTITUTIONS WHO BENEFITED FROM PRESENTING FALSE INFORMATION TO INVESTORS AND ARE BEING PROTECTES BY PUERTO RICO AND FEDERAL OFFICIALS

    Reply

  8. libra May 13, 2017

    Since the Politicians changed the law to permit Puerto Rico to go belly up–maybe they should take care of the bond holders.. I only lost 50 k in G.M. bonds when Obama Stole them from me and then did a 60 day bankruptcy on the largest corporation in the world.. Obama then became the CEO of G.M. He gave funds that should have gone to the bondholders to the UAW to repay a loan they gave him to buy the presidency. First time in US history a promise to bondholders was denied and broken by theft. I got a crappy a$$ handful of GM common stock that only recently paid a div. Obama put a criminal in charge of GM for a few months and instead of going to prison and having a trial Steve Ratner got 5 million $ for 6 months on the Obama theft express. A really crappy illegal way to treat individual bondholders and many pension plans across the USA. PR gave big bonuses to their bloated political class last Dec knowing they were insolvent.. They should never be permitted to sell anything ever again in this country. Crappy int. rates and criminals in government– I am sick of it Schumar and his merry band of criminal commies need to be drained from the cesspool they have become so the USA can move forward cleaning up 8 years of their mess and corruption.

    Reply

  9. Michael May 14, 2017

    WOW, Mike! Doesn’t that sound familiar with this current administration? Also, with Puerto Rico as a U.S. territory, they actually don’t contribute to the U.S. by paying federal taxes. Which leaves the U.S. tax payer footing their bill. Do we want them as the 51st state?

    Reply

  10. Carl Nixon May 15, 2017

    We should dump Puerto Rico. Let them become an independent nation and pay their own debts. I do not like my taxes to be paying for their folly. Our government has enough folly to pay for, and then some…..

    Reply

  11. BGeorge May 16, 2017

    The creditor of the bankrupt (1933) united States of America is a private company named the “Federal Reserve Bank” and their collection agency, the “Internal Revenue Service” are both domiciled in the ‘Port-of-RICO’ (Racketeer Influenced and Corrupt Organizations Act). Clever jokesters, eh? So, why are “we the people” responsible for repayment of the government’s debt? Because of clever changes in the law in 1938. Trump can eliminate income taxes because he knows they go to the FRB, not the government.

    Reply