You may have heard about the Eurozone crisis (see also cartoon below) and the City of Detroit’s well-publicized decision to declare bankruptcy, but did you know about Puerto Rico’s debt crisis. If not, check out this in-depth report published in yesterday’s New York Times. Here is an excerpt:
Puerto Rico, with 3.7 million residents, has about $87 billion of debt, counting pensions, or $23,000 for every man woman and child. That compares with about $18 billion of debt for Detroit, with a little more than 700,000 people, or about $25,000 for every person in the city. * * * Detroit, at least, was able to seek relief in bankruptcy court, but Puerto Rico is in a legal twilight zone. Territories, like states, have no ability to declare bankruptcy. Another territory, the Northern Mariana Islands, tried in 2012, but its case was rejected.
Although the bankruptcy code does not apply to a sovereign state or territory, why shouldn’t Puerto Rico opt for a “strategic default” on its sovereign debt to force Congress to deal with this mess? The answer appears towards the end of the NY Times report:
The three main ratings agencies [i.e. Standard & Poor's, Moody's, and Fitch] have held Puerto Rico’s general-obligation debt one notch above junk, despite the deterioration of the last few weeks. * * * A one-notch downgrade would officially send Puerto Rico’s general debt into junk territory, with troubling consequences. Puerto Rico, like Detroit and numerous other localities, is party to financial contracts known as interest-rate swaps, which require it to post cash collateral if its credit falls below investment grade. In addition, mutual funds and other institutions might have to sell their Puerto Rican holdings if they lose their investment-grade ratings. That could set off another damaging run.
One last point. Notice that Puerto Rico’s political status in no way affects Puerto Rico’s looming debt crisis. The problem would essentially be the same even if Puerto Rico were a US State or an independent republic. Maybe Puerto Rico should opt to become a county of the State of Florida. That way, it could follow Detroit’s approach and simply declare bankruptcy.