Puerto Rico’s borrowing costs have hit a record high, bringing the island country on the international radar screen as the government tries to address a growing debt crisis.
The self-governing US commonwealth has around $87 billion in debt that it is finding much harder to service. Local authorities are talking with President Barack Obama’s administration about potential solutions, but the island could become a major casualty of the partial government shutdown. Congressman Pedro Pierluisi told Emerging Markets that “the territory can stabilize the fiscal and public finance situation in the short run with the right policies and meaningful federal government guidance.”
He said, however, that the shutdown is compounding the problem. “Over 10,000 individuals who reside on the island work for the federal government and roughly half of them have been furloughed.”
He said that Governor Alejandro Garcia Padilla’s government needs to reconsider tax hikes that have not generated the expected revenue and have kept the economy from growing. The Garcia government has implemented a new corporate tax and sales taxes as part of its effort to balance the $9.8 billion budget for the fiscal year that started in July.
Joseph Rosenblum, director of municipal credit research at AllianceBernstein in New York, agreed with Pierluisi’s assessment. He told Emerging Markets that while the Garcia government has been undertaking reforms, it is not going to meet targets. “They have taken steps to address the pension issue, but they have not always met expectations,” he said.
Rosenblum said the same thing was true with hikes in taxes and on fees. Tax revenue in the first quarter was $1.68 billion, falling slightly short of the forecast. It was, however, higher than the same period the previous year.
“Puerto Rico is in a unique situation. It is a major issuer of debt with yields widening out significantly for all its paper. The amount of debt has people worried,” said Rosenblum. The problem extends beyond Puerto Rico. Pierluisi said “70% of [US] municipal bond funds own Puerto Rico bonds, meaning that Puerto Rico’s problems could have broader ripple effects.”
Resolving the issue is complicated by Puerto Rico’s political status. It cannot file for chapter 9 bankruptcy, an option open to US municipalities, because states and territories are not given that option. The most recent example is Detroit, Michigan.
Bankruptcy for municipalities has been a possibility since the 1930s, with slightly more than 600 local governments using this mechanism. Turning to the federal government is an unlikely option, given the crisis in Washington and the partial government shutdown.
Governor Garcia and members of his team have been shuttling between home and Washington to talk with policymakers, but there are few options. Rosenblum said it was “hard to envision them getting any major assistance given the federal budget struggle”.
Pierluisi, who met administration officials at the White House on 9 October, said the “federal government has been closely monitoring the situation. They must provide specific guidance and clear counsel to help the Puerto Rico government better manage the fiscal situation ... to maintain access to capital markets.”