The Puerto Rico Financial Crisis Close to a “Death Spiral”

According to Puerto Rico's governor, Alejandro Garcia Padilla, Puerto Rico can no longer pay off its $73 billion debt. The governor has warned the U.S that the island is dangerously close to being in a death spiral. Puerto Rico’s default on billions of dollars of Puerto Rico municipal bonds has lead to massive investment losses for investors throughout Puerto Rico and the United States.

Puerto Rico's economy has been declining for years due to government overspending, high energy costs and poor tax revenue. The island is currently attempting to obtain concessions from creditors, including deferring some debt payments, and extending the repayment schedule. Even if an outright default does not happen, investors are likely to incur enormous as a result of the Puerto Rico financial crisis.

One immediate problem is a $400 million debt payment that Puerto Rico’s government-run electricity provider, PREPA, must make on July 1. PREPA almost certainly cannot pay the money that it owes. To reflect the likelihood of default, Moody's rates PREPA’s bonds in the lowest possible category of junk bonds.

Puerto Rico’s terrible economy has caused many residents to leave the island for the United States. However, that only exacerbated the problem because it shrunk the island's tax base, which the government needs to pay its debts and to pay its operating costs. Rather than shore up its economy, the Puerto Rican government has simply issued more and more debt to pay off its current debt. It now appears that the problem is on the verge of collapsing the island.

Investors who own Puerto Rico bonds and Puerto Rico bond funds are expected to suffer billions of dollars in losses if this problem is not fixed immediately.

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