Tuesday, September 24, 2013

Debt Bomb Hits Puerto Rico

THE AMERICAN INTEREST
September 23, 2013

Puerto Rico’s debt crisis has just been moved up to DEFCON 1. The WSJ reports that a number of financial firms are taking the radical step of limiting investor access to the island’s debt and warning smaller brokers to stay away. As the Journal notes, this is an extreme measure that is rarely ever used. The fact that it’s happening to Puerto Rico suggests that the bond market is deeply concerned about the state of the territory:
UBS said it told clients this week who want to buy Puerto Rico debt that they must sign a document acknowledging the risks. Earlier this month, Wells FargoWFC -1.28% & Co. analysts sent a note to the firm’s more than 15,000 advisers warning of the hazards of Puerto Rico’s debt….
“Investing in Puerto Rico is not for the faint of heart,” said Alan Schankel, a strategist at Janney Montgomery Scott. “We think Puerto Rico will avoid default, but this outcome isn’t assured.” Mr. Schankel is advising clients to limit Puerto Rico holdings to no more than 5% of a muni-bond portfolio.
This is extremely bad news for an island that has seen plenty of it—bonds have already reached the astronomically high rate of 10 percent, and are now hovering near junk status. Meanwhile, as we noted recently, the island’s economy is cratering and its pensions are massively underfunded. Now it will find it considerably harder to borrow to fund its day-to-day operations.
In Puerto Rico, as in Detroit, debt has been a killer.
MORE: http://blogs.the-american-interest.com/wrm/2013/09/23/debt-bomb-hits-puerto-rico/