Bond Insurers Crash, Hit by Puerto Rico’s Default Shrapnel
On Monday, Puerto Rico’s government released a report that gave the municipal bond market the willies.
Written by former World Bank and IMF economists, it vivisects Puerto Rico’s finances, lays out the basic fact that the nearly $73 billion in bonds that the US commonwealth has outstanding, amounting to nearly 70% of its GDP, are of dubious value, and offers a debt restructuring strategy.
The report is decorated with financial doom and gloom: Outmigration has caused the population to drop nearly 8% since 2006 to 3.5 million today, even while the debt kept ballooning. It contained this choice passage:
The single most telling statistic in Puerto Rico is that only 40% of the adult population – versus 63% on the US mainland – is employed or looking for work; the rest are economically idle or working in the grey economy. In an economy with an abundance of unskilled labor, the reasons boil down to two.
– Employers are disinclined to hire workers because (a) the US federal minimum wage is very high relative to the local average (full-time employment at the minimum wage is equivalent to 77% of per capita income, versus 28% on the mainland) and a more binding constraint on employment (28% of hourly workers in Puerto Rico earn $8.50 or less versus only 3% on the mainland); and (b) local regulations pertaining to overtime, paid vacation, and dismissal are costly and more onerous than on the US mainland.
– Workers are disinclined to take up jobs because the welfare system provides generous benefits that often exceed what minimum wage employment yields; one estimate shows that a household of three eligible for food stamps, AFDC, Medicaid and utilities subsidies could receive $1,743 per month – as compared to a minimum wage earner’s take-home earnings of $1,159. The result of all of the above is massive underutilization of labor, foregone output, and waning competitiveness.
To fix this situation, bondholders are now asked to step up to the plate.
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