Is Puerto Rico the New Greece?
While the world’s attention has been firmly fixed on Greece’s debt crisis and the “Grexit” threat, there is trouble brewing much closer to home. Staying largely in the Greek shadow, Puerto Rico is on the brink of defaulting on its debts. The parallels with Greece are unavoidable, and not just on account of the timing, so it is worth taking a deeper look into whether Puerto Rico is the United States’ own Greece and if its looming debt default could potentially have similar repercussions.
Background
What has been going on with Puerto Rico? In short, once a prosperous Caribbean nation, in the past decade Puerto Rico has seen its economy shrink considerably. This trend, the growing migration of citizens to the mainland, as well as the island’s labor policy, have all conspired to create the perfect storm for Puerto Rico.
Jumping to present day, Governor Alejandro Garcia Padilla recently told the New York Times that the nation’s $72 billion debt was ‘not payable,’ while Reuters quoted Moody’s as warning that the probability of Puerto Rico defaulting on its securities was approaching 100 percent.
Much like Greece, Puerto Rico has been asking its creditors for debt relief, and much like Greece, it relies on a much wealthier economy to the north. The island’s debt, owed to a combination of creditors, is higher per capita than any US state.
Default Repercussions
With Puerto Rico’s default almost certain, one cannot help but wonder about the potential impact on the US economy, especially given the parallels with Greece and the chaos which the Grexit could unleash not only on the Eurozone but on the world.
In addition to disrupting the life of Puerto Rico’s citizens, the repercussions of a default would ripple through the traditionally low-risk bond market, impacting investors such as retirement funds.
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