Puerto Rico is caught in a trap. In a desperate attempt to put the island’s finances on stable footing, the Governor has been pushing pension cuts, higher taxes, and lower spending. Unfortunately, these haven’t fixed the deficit, and Moody’s has become concerned that Puerto Rico could run out of money unless it borrows very soon. As a result, the ratings agency has threatened to downgrade the island’s bonds to junk status unless it borrows money in January. As CNBC reports:
In theory, Puerto Rico should be borrowing less, not more. But ratings agency Moody’s is concerned about a near-term liquidity shortfall—a lack of breathing room, so to speak, when it comes to covering what is budgeted to be an $820 million budget deficit this year.On Dec. 23 Moody’s wrote “An inability or unwillingness to access the market in January 2014 would be a negative rating factor.” In other words, not borrowing money, or better said, not being able to, could lead them to downgrade Puerto Rico’s debt, which would put the island at junk bond status.
Unfortunately for Puerto Rico, the markets are watching closely, and Puerto Rico could be downgraded anyways if interest rates on this new borrowing are bad enough. Given the territory’s shaky history and poor credit, this is a distinct possibility. Depending on how things shake out, Puerto Rico may ultimately dropped to junk status regardless of what it decides to do. This would be a serious blow to the already struggling island, as well as to the 70 percent of American municipal bond funds that are exposed to Puerto Rico’s debt. If Puerto Rico does eventually default, the effects will be felt across the country.Some of Puerto Rico’s problems are unique to the island, but most of them are similar to what is happening in struggling blue municipalities across America. The lesson for these cities is clear: fix your finances before it’s too late.