Ailing U.S. Economic Symptoms are Spreading… Puerto Rico on the Brink of Default

Forbes.com with Justin Vélez-Hagan, executive director of The National Puerto Rican Chamber of Commerce claims:
Default is Puerto Rico’s Inevitable Option.
Many experts say Puerto Rico is entering the eighth year of a recession, with at least one who considers it to be in the midst of an all-out depression. Gustavo Vélez, former economic adviser to the Governor, is one such analyst, acknowledging that the economy has been kept afloat by increasing taxes, with little or no effort to fix underlying structural problems. See Forbes.com

The Commonwealth of Puerto Rico, a U.S. territory, stands on the brink of a default, with $70 billion in debt, which Wall Street bloodsuckers say, should be paid by imposing brutal austerity on the island’s impoverished population. As the Washington Post very nervously commented on Dec. 1, [2013] a Puerto Rican default “would be far more disruptive than Detroit’s recent bankruptcy filing in July.” – larouchepac.com

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A heavily indebted island weighs on America’s municipal-bond market

Oct 26th 2013 http://www.economist.com/news/finance-and-economics/21588364-heavily-indebted-island-weighs-americas-municipal-bond-market-puerto-pobre

ALTHOUGH investors are now less jittery about a possible default by the American Treasury, they are rightly still nervous about a drama unfolding in the market for state and local debt. Since May, yields on bonds issued by Puerto Rico, a self-governing American territory, have shot up to between 8% and 10%, despite their (barely) investment-grade rating and tax-exempt interest.

Puerto Rico carries outsized importance in America’s almost $4 trillion municipal-debt market, which includes bonds issued by states and other local authorities as well as by cities. The island’s current debt, between $52 billion and $70 billion (depending on how it is measured), is the third-largest behind California’s and New York’s, despite a far smaller and poorer population. In America’s 50 states the average ratio of state debt to personal income is 3.4%. Moody’s, a ratings agency, puts Puerto Rico’s tax-supported debt at an eye-watering 89% (see chart).

Puerto Rico’s debt has long been a staple of American municipal-bond funds because of its high yields and its exemption from federal and local taxes—of particular appeal to investors in high-tax states. That let Puerto Rico keep borrowing despite its shaky economic and financial condition, until Detroit’s bankruptcy in July alerted investors to the threat of default by other governments in similar penury.

America won control of Puerto Rico in the Spanish-American war of 1898. Its people have American citizenship and receive American government pensions, but pay no federal tax on their local income.

The economy has big structural problems. Participation in the labour force, at 41%, is some 20 percentage points below America’s. The island has the federal minimum wage, even though local productivity and incomes are far lower than in the rest of America, creating a strong disincentive to hire. Inflated benefit payments, for disability for instance, discourage work. Moody’s Analytics reckons the territory’s bloated public sector accounts for 20% of employment, compared with 3.7% for the average state (though it provides some services that the federal government would on the mainland). Growth and investment are hampered by bureaucracy, stunted infrastructure and crime.

Shrinking, sinking…

Puerto Rico has been in recession virtually since 2006, when a federal tax break for corporate income expired, prompting many businesses to leave. As Puerto Ricans with prospects emigrate, the remaining population has aged and shrunk. The government has run budget deficits (prohibited for states) for the past decade, averaging 2.5% of GDP from 2009 to 2012. Its pension fund is only 7% funded, which is abysmal even by the standards of other American states and territories.

The current administration has sought to shore up its finances by increasing taxes by $1.1 billion (about 1% of GDP) and raising the retirement age for government employees, as well as the share of their salaries they contribute to their pensions. It has promised to wipe out its budget deficit, projected at $820m this fiscal year, by 2016.

Such austerity could further hobble growth, making it harder to shrink debt ratios. Luis Fortuño, the previous governor, lost his job last year partly because of public anger at the cuts he oversaw. Like Greece in the euro zone, Puerto Rico has no control over monetary policy (the preserve of the Federal Reserve), and so cannot mitigate a fiscal tightening with lower interest rates or a cheaper currency.

Investors meanwhile are so wary, after years of missed deficit targets, tardy financial reports and accounts opaquer than those of other states, that Puerto Rico has had to cut back on new bond issues. It is filling the gap with more short–term bank loans; but they come at punitive rates of interest and must be rolled over more often.

Read more: economist.com
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Puerto Rico on the Brink of Default; London and Wall Street Say `Kill Them All’

via: http://larouchepac.com/node/29079

December 3rd, 2013 • 11:55 AM

The Commonwealth of Puerto Rico, a U.S. territory, stands on the brink of a default, with $70 billion in debt, which Wall Street bloodsuckers say, should be paid by imposing brutal austerity on the island’s impoverished population. As the Washington Post very nervously commented on Dec. 1 [1], a Puerto Rican default “would be far more disruptive than Detroit’s recent bankruptcy filing in July.”

It’s clear that only the passage of a Glass-Steagall law can address Puerto Rico’s crisis. As Pedro Pierluisi (D), the island’s non-voting representative in Congress, told the Post [1], “some people might say ‘this [crisis] is their problem.’ But Puerto Rico is part of the United States; you own this problem. It is not like you can ignore it.”

Like most U.S. states, Puerto Rico cannot file for bankruptcy. In the event of a default, its constitution offers bondholders guarantees that they would be paid before pensioners and public workers, as is being discussed for Detroit. Currently the government faces $37 billion in unfunded pension obligations. Reflecting the Wall Street and London killer mentality, the London Economist snarled in its Oct. 26 edition [2] that Puerto Rico’s federal minimum wage law “creates a strong disincentive to hire.” And, it complained, its “inflated benefit payments, for disability for instance, discourage work.”

The island is in a profound recession, and has lost 54,000 residents (1.5% of its population) between 2010 and 2012; since 2006, the population has shrunk by 138,000 to 3.7 mn. It’s now experiencing the biggest mass exodus since the 1950s, as the big U.S. corporations that once employed a significant portion of the population in largely labor-intensive jobs, have relocated to countries where the cost of labor is even cheaper than in Puerto Rico—Haiti, Central America, Asia, etc.

Since 1996, the number of factory jobs in Puerto Rico has declined from 160,000 to 75,000. Unemployment is soaring: just over 41% of working-age residents have a job or are looking for one. One-third of the population relies on food stamps, and island residents are twice as likely to receive Social Security disability benefits as those on the mainland. The most thriving “businesses” on the island today are pawn shops and title-loan operations, which offer loans to people who put up their car titles as collateral.

Against this backdrop, the only way Puerto Rico has been able to fund its daily operations is by borrowing, the Post reports. Since 2000, issuance of government bonds, plus those floated by public corporations, has tripled. Because of their high yields and exemption from federal, state and local taxes, Puerto Rico’s bonds are held by three out of four municipal bond mutual funds. Last January, rating agencies downgraded the island’s bonds to just one level above junk.

SIMILAR REPORTS:
http://www.forbes.com/sites/richardfinger/2013/12/01/default-puerto-ricos-inevitable-option/
http://www.theguardian.com/world/2013/dec/03/puerto-rico-economy-debt-us-bailout
http://www.cnbc.com/id/101172850
http://blogs.reuters.com/muniland/tag/puerto-rico/
http://www.washingtonpost.com/opinions/puerto-ricos-sinking-economy-needs-help/2013/11/06/35b93dac-4327-11e3-8b74-d89d714ca4dd_story.html

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