Puerto Rico: Default Talk Ramps Up!

A couple of months ago when the press began its aggressive coverage of the Puerto Rican municipal bond market, default was never an option. However, Justin Vélez-Hagan, executive director of The National Puerto Rican Chamber of Commerce has called it inevitable. The Chamber of Commerce official has cited more than 10 facts for his opinion: 1) $70 billion of debt is now held by institutional investors and mutual funds; 2) the debt-to-GDP ratio is now nearly 70% and growing; 3) including pension obligations the debt-to-GDP ratio exceeds 90%; 4) the per capita debt load is $19,000 per person on this tiny island, which is many multiples over the debt load in any state; 5) the eight-year recession has contracted the economy by over 16%; 6) the 2014 budget deficit is estimated between $300-$800 million; 7) the repeal of IRS Rule 936 has caused the giant pharmaceutical manufacturers and many other mainland corporations to continue to close their businesses on the island; 8) Puerto Rico has become a welfare state with only 40% of eligible workers seeking employment; 9) federal government assistance programs account for 21% of Puerto Rico’s economy; and 10) debt service is now 20% of the budget and before long, even if interest rates remain at 9%, the debt service will increase to 30, 40 or even 50% of the budget.

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