Pouring fuel on Puerto Rico's financial fire
Is Puerto Rico about to become the next Detroit, another economic black eye for the U.S.?
The island, a U.S. territory and self-governing commonwealth, once had one of the most dynamic economies in the Caribbean, fueled in part by manufacturing investment from the U.S. mainland.
And for years businesses in Puerto Rico received federal tax breaks meant to encourage U.S. corporate investment in the island. But those tax breaks were phased out in 2006, causing many manufacturing jobs to relocate elsewhere and contributing to the commonwealth's current economic tailspin.
Puerto Rico now faces double-digit unemployment, a debt burden of over $70 billion (larger than any U.S. state) and a credit rating downgraded to junk status.
Part of the island's dilemma is its unique political status. As The New York Times pointed out recently, while U.S. cities and counties in economic crisis can seek financial remedies in U.S. bankruptcy courts, "federal law denies that option to United States territories and commonwealths."
And over the weekend, The Wall Street Journal reported that Puerto Rico's government and creditors were bringing in some former International Monetary Fund officials to help the island fend off default, in the hopes of resolving a chaotic financial situation that "may require a restructuring more akin to Greece than a troubled city like Detroit."
Much of Puerto Rico's municipal bonds are now owned by hedge fund groups, and according to The Journal those hedge fund creditors are demanding the government make some significant economic overhauls. Among them: tax hikes, more financial disclosure and a round of budget cuts, all of which are sure to be politically unpopular.
And if you think you're financially immune from what's happening in Puerto Rico, you may want to check your portfolio. Puerto Rico municipal bonds are in many cases tax-exempt and, according to the Government Development Bank for Puerto Rico, are "held mainly by U.S. mainland investors, including individuals, bonds funds, insurance companies, commercial banks, and others."