Tempting rescue

17 September 2013 By Martin Hutchinson

The island economy, beset by lost tax breaks, a construction bust and youth emigration, has suffered a 20 pct fall in GDP since 2006. Without a swift recovery, its $70 bln of bonds are in danger. It’s not too big to fail and Washington risks muni moral hazard with a rescue.

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Interest rates on some of Puerto Rico’s $70 billion in municipal bonds ($19,000 per capita gross, $14,000 per capita net, more than any U.S. state) spiked to over 10 percent in the week of Sept. 9. The government issued $1.4 billion in short-term bank anticipation notes on Aug. 29, but has been forced to cut back its planned issue program of $3 billion in 2013, planning bond sales between $500 million and $1.2 billion by the end of the year.
The Government Development Bank’s Economic Activity Index (January 1980 = 100) stood at 124.3 in July 2013, 20.5 percent below its peak in November 2005. The unemployment rate stood at 14.7 percent, down from a peak of 17.2 percent in April 2010 and up from a low of 9.3 percent in March 2006.
Puerto Rico’s government revenue dropped $155 million, nearly 2 percent, in the year to June 2013, with income tax revenues 15 percent below their 2010 level. The budget deficit was provisionally reported at $1.3 billion; since 2000 the government has reported 13 successive negative cash flows. The 2014 budget projected a deficit of $750 million. On Sept. 17, the final deficit for the year to June 30, 2012 was reported at $1.33 billion.

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