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Debt Bomb Hits Puerto Rico


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.

[Puerto Rican flag image courtesy of Shutterstock]

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  • qultr

    And the reason we are not dealing with this very problem in (especially) the blue states and the nation as a whole is….?

    • Vadim Pashkov

      because we (nation as a whole) own the printing press.

  • wigwag

    Investors who know what they are doing have the opportunity to make tremendous returns speculating in Puerto Rican debt instruments.

    • Anthony

      Traders and speculators can provide a useful service WigWag. But, Puerto Rican speculation can be hazardous for the uninitiated (sorting through information about businesses and Puerto Rican finances).

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