Puerto Rico – America’s Version Of Greece?

Tyler Durden's picture

Submitted by Pater Tenebrarum of Acting-Man blog,

The Crisis Worsens

We previously discussed Puerto Rico in these pages in October of last year (see “Puerto Rico’s Debt Crisis – Another Domino Keels Over”). At the time, the public debt crisis looked increasingly worrisome – in fact, it seemed as though Puerto Rico would eventually have to apply for a federal bail-out, and if it failed to get one, it might have to restructure its debt (it actually cannot do that, see further below). Several months have now passed and the situation apparently hasn't gotten better. Before we continue, allow us to point out though that noted contrarian Jeff Gundlach thinks that Puerto Rico will eventually be rescued – he believes that too many politicians have a vested interest in not letting anything bad happen:

“Municipal bonds are slightly overvalued, he said. Investors who are willing to tolerate volatility will get rewarded for the risk in Puerto Rico’s bonds. Too many politicians rely on votes tied to the stability of Puerto Rico to allow a crisis there, according to Gundlach. “Puerto Rico’s bonds are going to make it to the other side of the valley,” he said.”

(emphasis added)

We should point out to this that politicians don't always get what they want, especially in the event of a debt crisis. The cost of rescuing Puerto Rico may be deemed too high, and the politicians with a vested interest are not the only ones needed to green-light rescue measures. In the event of a bailout, others will have to justify their support to their own constituents. With that out of the way, here is a fairly recent chart of the Barclay's Puerto Rico municipal bond index:



Puerto Rico bond index

Puerto Rico's bonds continue to plummet - click to enlarge.



S&P has just downgraded Puerto Rico's debt to junk, as reported here:

“The most recent blow to Puerto Rico’s economic reputation is yet another downgrade of its debt, this time to junk. S&P slashed the rating on Tuesday because, in a nutshell, the commonwealth is going to need a lot more money and that money isn’t going to get any easier to come by.


Although some initial reports indicate that investors are shrugging off the downgrade, the possibility of further downgrades by the other two major ratings agencies, Moody’s and Fitch (which both currently rate Puerto Rico a mere notch above junk), could spark a sell-off by institutional debt holders. That would make it even more difficult for the government to raise the cash it sorely needs.”

(emphasis added)

There has of course already been a lot of institutional selling in Puerto Rico's debt, as the decline in its bond prices attests to. However, to the extent that the bonds are contained in investable indexes and other tracker products such as ETFs, future rating downgrades would of course provoke additional selling.

The economic backdrop meanwhile isn't particularly encouraging:




Puerto Rico's annual GDP growth – essentially the territory has been in a severe recession since 2007 – click to enlarge.




Total public debt since 2007. The public debt-to-GDP ratio is almost at 100% by now – click to enlarge.



On the Skids

According to a recent article in the NYT, Puerto Rico has a set of problems that reminds us a bit of Greece in several respects. Specifically, the persistence of the economic slump, the high unemployment rate, the incredible size of the public debtberg relative to the population, and an accelerating exodus of said population as it no longer sees a future for itself in the territory. The new governor has even jokingly wondered whether it was really such a good idea to take the job:

“Puerto Rico’s slow-motion economic crisis skidded to a new low last week when both Standard & Poor’s and Moody’s downgraded its debt to junk status, brushing aside a series of austerity measures taken by the new governor, including increasing taxes and rebalancing pensions. But that is only the latest in a sharp decline leading to widespread fears about Puerto Rico’s future.


In the past eight years, Puerto Rico’s ticker tape of woes has stretched unabated: $70 billion in debt, a 15.4 percent unemployment rate, a soaring cost of living, pervasive crime, crumbling schools and a worrisome exodus of professionals and middle-class Puerto Ricans who have moved to places like Florida and Texas.


The situation has grown so dire that this tropical island, known for its breathtaking beaches, salsero vibe and tax breaks, is now mentioned in the same breath as Detroit, with one significant difference. Puerto Rico, a United States territory of 3.6 million people that is treated in large part like a state, cannot declare bankruptcy.


From bottom to top, Puerto Ricans are watching it unfold with a mixture of disbelief and stoicism. Alejandro García Padilla, who was elected Puerto Rico’s governor by a sliver of a margin in 2012, said that after he began to wade deeply into the island’s economic and social quagmire, his fight-or-flight instincts kicked into high gear.


“I thought about asking for a recount,” Mr. García Padilla, 42, said with a grin during a recent interview in La Fortaleza, the 500-year-old government residence, recalling, among other things, the $2.2 billion deficit. “But now it’s too late.”

(emphasis added)

Puerto Rico cannot declare bankruptcy, but that doesn't actually matter. It can still go bankrupt anyway, with or without a 'declaration'. We're actually not sure what this is supposed to mean in practice. Does it mean that servicing its debt takes precedence over all other government expenditures? In that case one could envisage a hypothetical future in which the only remnant of its government will be a band of armed tax collectors.

Similar to Greece, the measures taken to lower the deficit have probably made the deficit ultimately worse by destroying large swathes of the small business sector:

“A sense of pessimism pervades on the island. Streets are lined with empty storefronts in San Juan and in smaller cities like Mayagüez; small businesses, hit hard by high electricity, water and tax bills and hurt by drops in sales, have closed and stayed closed.


Schools sit shuttered either because of disrepair or because of a dwindling number of students. In this typically convivial capital, communities have erected gates and bars to help thwart carjackers and home invaders. Illegal drugs, including high-level narco-trafficking, are one of the few growth industries.”

(emphasis added)

Evidently, the government has taken the euro area approach to dealing with excessive government debt. This is to say, instead of concentrating on cutting its spending, it has raised the fiscal burden on businesses, many of which cannot continue to operate given the new impositions. This in turn lowers tax revenues, as many formerly tax paying establishments no longer exist. The predictable effect on the public debt is that it keeps growing.

Austerity always seems to mean 'austerity for everyone except government'. However, that is a formula that cannot possibly work, as it amounts to slaying the goose that lays the golden eggs. The result is a never-ending tale of woe:

“Puerto Rico, about 1,000 miles from Miami, has long been poor. Its per capita income is around $15,200, half that of Mississippi, the poorest state. Thirty-seven percent of all households receive food stamps; in Mississippi, the total is 22 percent.


But the extended recession has hit the middle-class hardest of all, economists said. Jobs are still scarce, pension benefits for some are shrinking and budgets continue to tighten. Even many people with paychecks have chosen simply to parlay their United States citizenship into a new life on the mainland.


Puerto Rico’s drop in population has far outpaced that of American states. In 2011 and 2012, the population fell by nearly 1 percent, according to census figures. From July 2012 to July 2013, it declined again by 1 percent, or about 36,000 people. That is more than seven times the drop in West Virginia, the state with the steepest population losses.”

(emphasis added)

The shrinking population is obviously a significant problem as well – it means that the burden of the government's debt is borne by fewer and fewer citizens, who must fear that even more hardship will be imposed on them. This in turn is likely to accelerate the exodus.

And indeed, the enormous costs businesses face in Puerto Rico are inter alia a direct result of government running major industries – running them into the ground, that is. Citing the example of a struggling small business owner the NYT writes:

“But his expenses mounted, including $600 a month in power bills, more than double what consumers pay on the mainland. The sky-high cost is a consequence of Puerto Rico’s inefficient government-run monopoly on electricity and its 67 percent dependency on petroleum for electric power. Other utilities are exorbitant, too. Last year, water rates rose 60 percent in a bid to help cut the state-run water company’s debt.

(emphasis added)

Obviously letting the government run electricity and water utilities was a bad idea, as it always is. Such publicly-owned monopoly industries usually provide ample opportunities for graft and political cronyism (see Greece as a pertinent example) and it was probably no different in Puerto Rico. Here are a few of the things the new governor has done to bring the deficit down:

“Vowing not to lay off any more workers, he raised taxes sharply to provide much-needed revenue and moved aggressively to promote incentives to entice wealthy investors, like the hedge fund billionaire John Paulson, who has invested in an exclusive beach resort and condo complex.”

(emphasis added)

The workers he didn't want to lay off are of course government employees. In other words, net consumers of the wealth others produce (government doesn't produce anything of value – if it were, it would not need to obtain its revenue by coercion).

And if at the same time, he moved to 'entice billionaires' like John Paulson to invest, he obviously has to get tax revenue from someone other than billionaires. The 'sharply raised taxes' have have thus hit small business and the middle class the hardest. Some of the tax impositions are so bizarre as to defy belief:

“His tax increases have hit some businesses hard, which could pose a further drag on the economy. Among the many taxes he initiated, the governor raised the corporate tax rate to a maximum of 39 percent. Last year, the economy continued on a slide. “The new administration has a bookkeeping mentality as opposed to an economic development mentality,” said Pedro Pierluisi, Puerto Rico’s nonvoting representative in Congress and a political opponent of the governor. “Here you find Puerto Rico with an underlying economic problem charging its corporations — its job creators — 39 percent. Hello!”


Perhaps the most maligned is the new lucrative gross receipts tax, which some owners of small- and medium-size businesses say threatens to put them out of business. Because of the way the tax is structured, it affects companies with less than a 5 percent net profit margin. This means that many food-related companies, like supermarkets, and new businesses, are hit hardest. The smaller the margin, the higher the tax.


Some stores are paying an effective tax rate of 130 percent, said Manuel Reyes Alfonso, the vice president of a trade association that represents the food industry. If the tax is not revised, some will be forced to shut down and others will have to raise prices, he said. “It is absurd,” said Mr. Reyes Alfonso. “It’s like selling the car to buy gas.”

(emphasis added)

A 130% tax rate? Yes, that is going to work out for sure. The lower one's profit margins the more tax one is forced to pay? We wonder who came up with this stroke of governmental genius.



Frankly, it is a complete mystery to us how a small territory enjoying all the advantages of being part of the US while remaining largely self-administered, sporting an inviting climate and endowed with great natural beauty, could ever be so insanely mismanaged that it ends up with an unbearable debt burden and an economy that seems caught in an unending downward spiral. It must have  taken a real effort to bugger such excellent starting conditions up.

The global crisis that began in 2007/8 has unmasked many unsustainable economic dispositions. Unfortunately, the proper conclusions have still not been arrived at, as evidenced by the fact that the same old Keynesian recipes that have failed over and over again are being implemented on an even grander scale. One must not be misled by the claims of 'austerity' being imposed, as this has evidently little bearing on government spending as such, but is rather an attempt to squeeze more blood out of an already shriveled turnip, namely what remains of the private sector. Puerto Rico seems – at least so far – not any different in that respect.

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Boris Alatovkrap's picture

I like to be in America
Okay by me in America
Everything free in America

666's picture

Their plight seems to be about the same as the USSA's. If only they could print up endless amounts of currency...

knukles's picture

Nattering nabobs of negativism
Everything fixed.

economics9698's picture

I thought Puerto Rico wanted independence?  Maybe we can finance an independent Puerto Rico movement and get them into the Promised Land.


A workers paradise for Puerto Rico just like Cuba.

0b1knob's picture

Puerto Rico's debt = $80 billion?  About one month's QE.   A mere trifle.

How about statehood?   Puerto Rico gets bailed out, the demotards get two more safely Demo senate seats and a half dozen house.

What?  Puerto Ricans voted statehood down?   Too stupid to live....

OC Sure's picture

"...endowed with great natural beauty, [and being] ever so insanely mismanaged that it ends up with an unbearable debt burden and an economy that seems caught in an unending downward spiral."

Puerto Rico is just a metaphor for all of America though, right? Isn't America America's Greece?

mjcOH1's picture

I'd say they're fucked until their votes get included in the electoral college alotment for the presidency.  

Then the Kenyan or whatever thing the entitled replace it with will leave no dollar unpaid in the race to trade votes for entitlements.

The Vineyard's picture

Those folk need to learn to speak Englishee.  How dare they.  Bitches.

Pool Shark's picture



If they voted against statehood, the reason is likely that that they didn't want to start paying federal income taxes like the rest of us US citizens.


TruthHunter's picture

"Those folk need to learn to speak Englishee. "

They all study English. The ones who actually can learn it leave. Moving

to the States means you passed your IQ test.

tThe murder rate is 10 % higher than Mexico's. 

LMAOLORI's picture



More like taxpayers are f**ked already by the Kenyan Dictator

The Obama Administration's Backdoor Bailout Of Puerto Rico


A lot of powerful interests like the current situation. They include the government and both major political parties in Puerto Rico, the Obama administration, investors in Puerto Rico’s municipal bonds, and U.S. multinationals that can credit the tax. The only ones on the short end of the stick are U.S. taxpayers, who are footing the bill that they would probably be unwilling to pay if they were ever asked.


And just the other day from Reuters

'Backdoor bailout' boosts Puerto Rico's revenues


For three years, the IRS and Treasury Department have been assessing the legality of the credit. The evaluations continue, a Treasury Spokesperson said on Monday, adding that any final decision will be "prospective." That means corporations will not have to pay retroactively for taking the credit if it is ultimately deemed unconstitutional.

"This look-the-other-way approach to the credit-ability of the tax may be questionable procedure and policy, but it has furthered the Obama administration's goal of maximizing assistance to Puerto Rico under current law," wrote Sullivan, who first highlighted the growth of Act 154 last month. "It is unlikely in these times of extremely tight budgets that the administration could obtain congressional approval for financial benefits of similar magnitude."

booboo's picture

Right, they don't want the burden of being a state but want all that free shit army stuff.

We call them New Yorkaricans down here, they fly to New York from the island just for the wide brim baseball caps and "I Love New York" sticker and move to Florida for the sun and free shit.

neidermeyer's picture

Puerto Ricans don't want statehood... too many perks associated with being a deadbeat commonwealth ... and maybe you haven't heard yet but Dear Leader (or as he is called in PR "El Hefe") has a pen AND a telephone and no longer needs legislative consent... so PR is "SOL".

Freddie's picture



We're all living in Amerika
Amerika ist wunderbar
We're all living in Amerika
Amerika, Amerika

We're all living in Amerika
Coca-Cola, sometimes war
We're all living in Amerika
Amerika, Amerika

Paveway IV's picture

+100 for Rammstein ref.

RafterManFMJ's picture

Puerto Rico you poor rough Caribbean diamond - when will you burdens lift and your trials cease?

Come, join the Union and enjoy our decline!

Boris Alatovkrap's picture

Major export of Puerto Rico is Rum and Poverty. Is welcome in AmeriKa!

MrButtoMcFarty's picture

Puerto Rican ass is some of the finest ass in the world....they got some nice beaches and good food too....


DaddyO's picture

If you happen to be in San Juan try this place.


Very Good!


MrButtoMcFarty's picture

I avoid San Juan these days....I usually fly into Aguadilla or Ponce and stay on west coast....probably been 20x or so over last 25 years....

I got my eye on a little banana/citrus farm in the mountains but only 20min or so to Combate/Rincon areas.

Eight acres with a 300' of springfed river frontage....a small waterfall....no pesticides or chemicals ever.

The locals are friendly for most part....they know the banksters are fucking them over....they just live their lives and get by.

Honestly....there is major opportunity on much of island right now....but one must understand that the locals wont tolerate ugly american bullshit....you reap exactly what you sow.

Theosebes Goodfellow's picture

Sounds great! Good luck with the finca, compai!

Rafferty's picture

How much did that cost you, if you don'y mind my asking?

booboo's picture

They all have a fine ass until they hit thirty and BAM....Titanic Ass strikes them.

Freddie's picture

Rum mit Coca Cola - wunderbar

neidermeyer's picture

PR rum is very good , not as good as Mount Gay but quite nice ,, especially the "made for local consumption" overproof rum... I lived in Guaynabo in the 1960's and it was unmistakable even then that PR would never amount to anything.. currently there are exactly ZERO English language radio stations on the island... they just want the "free shit" ... LOSERS!


As someone else here noted the west and south parts of the island are the best... would be a nice place to buy some land and disappear...

Harbanger's picture

Right now they actually have potential because of their low income tax.  That will end soon as it looks like they want to join the US keynesian failure.

Freddie's picture

Oh F**k - they will always be the 51st Detroit

ZerOhead's picture

Too many politicians rely on votes tied to the stability of Puerto Rico to allow a crisis there, according to Gundlach. “Puerto Rico’s bonds are going to make it to the other side of the valley,” he said.”

Fifty bucks says Team Yellen back at the Fed will make sure of it...

knukles's picture

Puuuuuuuuuuuurfect addition to the Fed's balance sheet. 

Since we're exceptional there should be no qualms about the Fed's Zimbabweization of the balance sheet in terms of size or quality.

After all it isn't called Qualitative Easing for nothing.*

Foreward, Bitchez!

*maniacal laughter

disabledvet's picture

I think Mr. Gundlach is making a statement vis a vis the creditors...not Puerto Rico.

Obviously we have already not only had bankruptcies here in the USA...but they include economies that have a lot more than "sandy beaches."

Cue "thousand dollar an hour lawyers" as the "hits keep coming" vis a vis the Fed.
That's what Felix Solomon meant when he said "we have an over reliance on the Fed here."

To my knowledge there is no "plan" (legislation) to "rescue Puerto Rico."
Apparently the expectation is for the Fed to do a 65 billion dollar bailout.
That might explain why the dollar is tanking here.

Name one municipality that won't want that deal right now...

ebworthen's picture

The U.S. is it's own slow motion economic crisis; Puerto Rico is our canary in the coal mine.

Detroit and Stockton are our stateside canaries.

NoDebt's picture

Worth it only for this new word:  debtberg.

Puerto Rico is Detroit south.  I'm amazed that the author is amazed that this mess could happen there.

Boris Alatovkrap's picture

<-- Debtroit

<-- Poorto Rico

Skateboarder's picture

<-- Stawkton

<-- San Bankruptino

Boris Alatovkrap's picture

Is not San Bandido, name after patron saint of municipal kleptocracy?

wisehiney's picture

 Naw, but I heerd that nukular bombs was invented there.

The muni queen biotch of the world is the mayor that lives just up the street. THINK BIG! she says

Shad_ow's picture

No worries, Peurto Rico, our government never lets a crisis go to waste and Obanana has a magic pen.

fonzannoon's picture

Oppenheimer Funds, the right way to invest (in Puerto Rico)

economics9698's picture

They must have pulled out like in Venezuela.  Wandering .....

The Reich's picture

Look at GNP growth in 2012!!!

Goldilocks's picture

Brother Nathanael, http://realjewnews.com

IRS: NOT a gov't agency, operates on Puerto Rico for the private FED
http://www.youtube.com/watch?v=oiQkAynPWhk (6:23)

Paracelsus's picture

Wasn't Loreena Bobbitt from Puerto Rico? Those PR women are good with knives.Yikes!

Bullish for titanium jockstraps....

buzzsaw99's picture

i guess the bankers weren't aware of the heavy burden they were placing on the poor of puerto rico. [/sarc.]

Brennus's picture

Puerto rico debe ser pobre puerto.
(Rich port is a poor port). [Thanks poor Google translations]

hootowl's picture

Ovomit should hire as many of those idiot poorto Rican government bureaucrats as possible to help him implement and expedite his plan of destruction for the U.S

R_Soles's picture

And now e have another doofus region, Quebec, wanting even more handouts from the rest of Canada to perpetuate their extreme socialisy agenda and on their way to bankruptcy as they have a net loss in population over the last 35 years. At least Puerto Rico has nice weather. Fuck, the EU indeed

syntaxterror's picture

EVERYONE gets a bailout. Load up on the 100%-tax-free PR bonds paying 10%. With unlimited free money courtesey of savers, you just know they'll get a bailout.