Puerto Rico, a Caribbean island of just 3.5 million, faces a deadline on dealing with $79 billion in debt. The US Commonwealth’s financial obligations account for 70% of the nation’s economic output.
From the Wall St. Journal:
The economy, meanwhile, faces big structural problems. Sprawling bureaucracy and high electricity costs stunt business investment. Tax evasion runs rampant. Unemployment is high, at 12%, and fewer than half of all civilians are in the labor force, compared with around 63% on the mainland.
Economists say a bloated welfare state discourages work—the share of the working-age population on disability is nearly 50% higher than in the 50 states —while a minimum wage that is high relative to productivity and local income reduces job opportunities for young and low-skilled workers.
Puerto Rico floated bonds paying a 10% yield annually. The bonds offer triple tax-free advantages and serve as a staple in many US mutual funds. The rolling obligation to pay off the bond interest places the island on a treadmill of recurring debt. And when a one-time medical care appropriation dries up in 2018, the government will have another economic hole to fill.
In many ways, the Puerto Rican situation mimics Greece. As Greece will affect the European Union, Puerto Rico could send ripples through the US bond market. Combined with China’s current bear market, three separate financial incidents could eventually join forces to bust the American stock market bubble.
For Puerto Rico, which does have the opportunity to seek Chapter 9 bankruptcy status, the government would have to seek permission from the US government to go that route before ultimately placing the strategy in front of the population as a referendum vote.
MoneyBeat.com explains why Chapter 9 protection may not be an option for Puerto Rico.
Puerto Rico Unable To Meet $72bn Debt Payments http://t.co/9N1WECfs8r
— Sky News (@SkyNews) June 30, 2015