Puerto Rico Bonds an Interesting Speculation???

WHERE PUERTO RICO STANDS

An Update on the Competitiveness of Puerto Rico’s Economy

July 31, 2014

DYI quick comment:  The New York Fed article is 10 months old; it continues to be "spot on." 

Economic activity in Puerto Rico remains generally flat at a depressed level and there are no strong signs that a meaningful recovery is taking hold. While Puerto Rico’s economy has historically paralleled the U.S. mainland economy, the Island’s latest downturn started earlier and was much steeper and more prolonged. Puerto Rico has now been in a slump since 2006.

 

More recently, serious fiscal challenges have surfaced that are closely interrelated with the Island’s weak economic performance. Persistent deficits in the Commonwealth’s fiscal accounts as well as mounting deficits in the operation of several major public corporations have substantially raised the Island’s overall public debt, leading to serious concerns about whether public debt at these levels can be sustained.

The clear challenge going forward will be for the Commonwealth government to continue making progress on efforts to raise the economic growth rate while at the same time taking credible steps to constrain the buildup of debt. Other countries as well as some U.S. states and municipalities, including New York City, have faced difficult economic choices similar to those that Puerto Rico must now address. The leadership of many of these jurisdictions took the steps necessary to manage this trade-off and successfully returned their economies to fiscal health.

DYI quick comment:  The above chart says it all; people are voting with their feet as the best and brightest leave Puerto Rico.

The Island appears to face two alternatives: either manage its own economic adjustment and put the Commonwealth on a secure fiscal basis, or wait for outmigration and the discipline of the market to force an even more painful adjustment, particularly for those unable or unwilling to leave the Island. Thus, the demanding choices Puerto Rico makes today will affect its long-run economic prospects and the future livelihood of its residents. A better future for Puerto Rico requires decisive leadership today. 

 March 04, 2015, 01:00 pm

Puerto Rico’s debt crisis: A Lehman moment for the island

While many argue that Puerto Rico's debt crisis is largely decoupled from the broader U.S. economy, as an American protectorate and dollar denominated market, allowing the island to default would be tantamount to a Lehman moment but on a national scale.  Neither a state nor an independent nation, Puerto Rico's financial crisis is a hybrid between a sovereign debt crisis of an independent nation and the "safe" debt of a U.S. municipality, city or state, which bondholders tend to flock to because of historically low default rates and the possibility of orderly debt restructuring enshrined in law.  Financial crises of this variety take a long time to fester and Puerto Rico's profligacy is the culprit.  Creating a false deadline for when this crisis needs to be resolved while at the same time not granting Puerto Rico debt restructuring rights afforded to the rest of the U.S. would not only hasten the island's economic collapse, it may bring down the municipal bond market and other parts of the economy with it. 

Painful economic choices lie ahead.  Puerto Rico has a chance to emerge as a stronger and leaner Caribbean economy.  For debt restructuring to be serious and to not only address the interests of hedge funds, Puerto Rico must consider all options, however unpopular, including the privatization of many of its sclerotic state owned enterprises.  Beginning with the electric power utility, PREPA, would be a wise choice.  PREPA contributes 13percent or $9 billion to the island's debt burden and the exorbitantly high energy costs that hurt households, businesses and tourists alike.  For Puerto Rico to remain a business and tourism destination in the Caribbean able to compete with 50 years of pent up interest in Cuba, deep reforms are needed once this debt crisis is resolved.  There are promising green shoots in the idea of making Puerto Rico a regional financial hub for the Caribbean and Latin America.  With billionaires like John Paulson calling Puerto Rico home due to its favorable tax code on capital gains, the island's last chance may rest in the hands of financiers whose paycheck persuasion and lobbyists will make them heard in Washington.

DYI Comments:  Puerto Rico to say the least is an interesting speculation; it is not for the faint of heart.  Only for those who have what I call the double extra money to work with.  If it goes to crap (50% or more decline) you are still on firm financial footing only your ego has been bruised.  Just wanted to pass this on, however you are on your own.

DYI