Commentary on the economic , geopolitical and simply fascinating things going on. Served occasionally with a side of snark.
Thursday, December 12, 2013
Puerto Rico sees its debt placed on review to junk downgrade by Moody's - with 70 billion in debt overall and 52 billion subject to the downgrade , this could make Detroit look like a walk in the park for Bond Land.....
Citing Puerto Rico's weak finances and economy, Moody's Investors Service put the commonwealth's general obligation rating of Baa3, the company's lowest investment grade rating, on review for downgrade on Wednesday.
Moody's also placed ratings capped by or linked to Puerto Rico's general obligation rating on review, including the Puerto Rico Sales Tax Financing Corporation's senior and junior lien bonds.
The moves affect approximately $52 billion of rated debt, the rating agency said in a statement.
Moody's said it is concerned about Puerto Rico's "weakening liquidity, increasing reliance on external short-term debt, and constrained market access, within the context of a weakened and now sluggish economy."
"These developments exacerbate the longstanding financial strain brought by the commonwealth's very high debt load and pension obligations, as well as its chronic budget deficits," Moody's said.
A major issuer of municipal bonds, Puerto Rico has been in or near recession for eight years. It has suffered from a loss of U.S. federal government economic support, spending cuts by its own government, high oil prices and population decline.
Boxes and wooden crates filled with household items bound for the U.S. mainland are stacked high in the Rosa del Monte moving company’s cavernous warehouse, evidence of the historic rush of people abandoning this beautiful island.
Puerto Rico lost 54,000 residents — 1.5 percent of its population — between 2010 and 2012 alone. Since recession struck in 2006, the population has shrunk by more than 138,000 to 3.7 million, with the vast majority of the outflow headed to the mainland.
And while government workers make up about a quarter of the commonwealth’s workforce — much higher than the U.S. average of 16 percent — their ranks are shrinking as the pervasive debt and economic problems careen toward a reckoning. Now, just over 41 percent of working-age Puerto Ricans are in a job or even looking for one.
As work has disappeared, more Puerto Ricans have relied on the government to survive: About a third of the commonwealth’s population relies on food stamps, and residents of the island are twice as likely as those on the mainland to receive Social Security disability benefits, according to researchers.
Puerto Rico has been in recession for 8 years. The unemployment rate is 15% and debt has piled up to the tune of $70 billion. How did Puerto Rico get into trouble? The short answer is the same way as Detroit: loss of industry coupled with lavish pensions.
Job flight, high crime rates, and huge pension woes in Puerto Rico seem similar to the problems in Detroit. However, there is no constitutional provision that allows US states and Commonwealths to declare bankruptcy.
Compounding the problem, Puerto Rico passed a massive set of tax hikes including corporate taxes, a broadened sales tax and a new gross receipts levy, hoping to get its budget under control. Given that tax hikes in the middle of a recession are about the worst possible choice, the situation is ominous.
So how is Puerto Rico's debt going to be paid back? The answer is it won't. Although, bankruptcy is out of the question, nothing can stop a default except a bailout by the US. Given that handouts from this Republican Congress are unlikely, look for Puerto Rico to default.
Puerto Rico is Toast
Of $70 billion in debt, $52 billion is subject to a downgrade to junk status. The rest may not even be rated.
A close friend with ties to the region writes ...
Those leaving are predominantly from the upper end of society, as they see opportunity melting away and fear a dead end for their children. Upper middle class Puerto Ricans are educated, speak English, and are absolutely free to move to the US and find jobs. As you noted, the upper 40% pay 106% of the taxes. So the exodus is obliterating the tax base. The feds don't want a run out of Puerto Rico.
But ultimately, the feds will have to step in, Republican Congress or not. The same policy that makes it completely easy for Puerto Ricans to move to the US means that if a panicked "run out of Puerto Rico" starts, it will be a smoking ruin. That would be extremely harmful to US foreign policy.
Puerto Rico’s general-obligation debt, already graded one step above junk, may be cut by Moody’s Investors Service if the commonwealth’s finances continue to deteriorate and it isn’t able to access credit markets soon.
The decision affects $52 billion of rated debt, Moody’s said. Puerto Rico’s securities are held by more than three-quarters of mutual funds that invest in municipal bonds, according to Morningstar Inc. (MORN) in Chicago. A rating cut may lead funds to sell some of those holdings.
Moody’s cited the island territory’s “weakening liquidity, increasing reliance on external short-term debt, and constrained market access, within the context of a weakened and now sluggish economy” in a statement on its decision. “These developments exacerbate the longstanding financial strain brought by the commonwealth’s very high debt load and pension obligations, as well as its chronic budget deficits.”
An index that measures Puerto Rico’s economic activity fell in October compared with the same period in 2012. It was the eleventh straight month of year-over-year decline, according to the Government Development Bank, which handles capital-market transactions for the territory.
The index showed improvement on a month-over-month basis. It rose 1.1 percent in September from the prior month, and by 0.6 percent in October. That marked the first consecutive monthly gains since 2012.
The self-governing commonwealth has been aiming to sell as much as $1.2 billion of sales-tax bonds by Dec. 31 to help balance budgets. A spike in the island’s debt yields has blocked Puerto Rico from accessing the capital markets.
All three major rating companies grade the securities one step above non-investment level, with a negative outlook.
The commonwealth’s bonds have lost 18.5 percent this year, the most since at least 1999, and more than seven times the decline in the broader muni market, Standard & Poor’s total return data show.
Puerto Rico general obligations maturing July 2041 traded Dec. 11 with an average yield of 9.16 percent, the highest level since Sept. 11, data compiled by Bloomberg show. The amount of yield investors demand to hold its tax-exempt bonds is 6.2 percentage points more than top rated 10 year bonds, according to data compiled by Bloomberg.
“While Moody’s has placed our general obligation and related bonds on review, we are pleased that they have identified that economic indicators may point to the start of economic stabilization for the commonwealth,” Treasury Secretary Melba Acosta Febo and Government Development Bank Chairman David H. Chafey said in a joint statement.
“We are further encouraged that Moody’s recognized our growing labor force, our economic plan focused on job creation, and the strength of fiscal 2014 revenue growth in the general fund through October,” they said.