PUERTO RICO GOING BANKRUPT: It’s been on the verge for a year. Investors Business Daily says Puerto Rico “essentially declared bankruptcy” earlier this month.
Puerto Rico is currently $73 billion in debt, which is close to 100% of the island’s annual output. It owes a sizeable portion of this to the island’s current and future pensioners: Puerto Rico’s pension fund is woefully underfunded. It also owes billions to general obligation bondholders — whose investments are guaranteed by the island’s constitution — and to COFINA (also known as Puerto Rico Sales Tax Financing Corp.) bondholders, who hold debt explicitly backed by sales-tax revenues.
Has Puerto Rico gone “Full Illinois” before Illinois goes Full Illinois? Not according to the article.
Illinois also has taken a page out of the Puerto Rico playbook by beginning to demonize its bondholders as greedy investment bankers profiting off the misery of others.
While such rhetoric plays well with the voters — and that is to whom Puerto Rico’s new governor, Ricardo Rossello, is clearly playing — it makes escaping the island’s financial predicaments more problematic. Once the Puerto Rican government and its oversight committee reach some sort of arrangement for moving the island forward, it will need to re-engage with capital markets to borrow money — whether it be for capital improvements, short-term credit arrangements, or something else.
If Puerto Rico spends the next year denigrating its lenders and trying to break contracts, few investors will want to take a chance lending money to the island again. Put simply, the market cannot credibly believe future repayment promises no matter what steps Puerto Rico takes — at least not until it returns to economic expansion and solvency.
What’s more, if Puerto Rico successfully breaks these covenants, municipal bondholders in Illinois — and elsewhere — are going to perceive that their investments now contain much more risk than they had previously perceived, and will demand a higher interest rate to take it.
In short, Puerto Rico’s shenanigans may hasten Illinois’ insolvency.
Oh. So we may have Full Illinois before Puerto Rico goes under, at least officially goes under.
Until history resolves the issue, here’s the interim bumper sticker: “Never go Full Illinois.”