Thursday, July 31, 2014

Puerto Rico: NY Fed Warns Commonwealth of $73 Billion in Public Debt

According to The Associated Press, New York's Federal Reserve Bank warned on Thursday (July 31) that Puerto Rico needs to improve its financial health soon or face a "painful adjustment."

The report came as the island's power company once again reached an agreement with lenders to extend a deadline to make payments on $671 million it owes to banks.

The 30-page report makes several recommendations that the New York Fed believes are needed to help push the Commonwealth out of a nearly decade-long economic slump.

"The island appears to face two alternatives: either manage its own economic adjustment and put the Commonwealth on a secure fiscal basis, or wait for out-migration and the discipline of the market to force an even more painful adjustment, particularly for those unable or unwilling to leave the island," it said.

William Dudley, president of the New York Fed, questioned whether Puerto Rico's level of debt can be sustained and said the government's challenge will be to revive the economy without accumulating more debt. The island is struggling with nearly $73 billion in public debt after having sold a record $3.5 billion in general obligation bonds in March 2014, despite having its credit rating downgraded to junk status. 

COMMENT: It should be noted that in President Obama's 2016 federal budget the link below reveals that the President conveniently authorized $2.5 million to conduct an empirical study to determine how many Puerto Ricans are in favor of US statehood:

Considering that 75% of Puerto Ricans voted for President Obama in the 2012 election, it stands to reason that the same 75% would predictably vote Democratic in the 2016 presidential bid, providing the Democrats a comfortable edge.

Needless to say, $2.5 million would reduce the Commonwealth's liabilities very nicely, rather than pulling a "fast one" on the Republicans.

Additionally, Puerto Rico has not only the highest unemployment rate in the US (15%), but also has highest homicide rate in the country, second only to Chicago.

After a brief "bump" in 2012, Puerto Rico's economy has stagnated since 2013, the report said. It said the island of 3.65 million people has a 45% labor force participation rate and has seen a significant drop in population. 

Puerto Rico also struggles with a largely uneducated working-age population, although the number of people with a college degree increased from about 25% to nearly 28% between 2010 and 2012.

Analysts recommended Puerto Rico shrink its underground economy, broaden its tax base and reduce rates, and strengthen and possibly privatize some public corporations, which account for nearly 40% of the island's debt. They said the government also should approve legislation requiring the creation of a long-term budget as well as providing greater transparency in its financial reporting.

"Puerto Rico's unique status means that it is one of the few places in the world where finances are not regularly surveyed by a public agency," the report said.

The administration of Gov. Alejandro Garcia Padilla has taken numerous steps to help boost the economy, including implementing changes in public pension plans, streamlining its business registration and permitting process and cutting of expenditures. Garcia also appointed an advisory group for tax reform that is expected to release a report by year's end with plans to implement it by fiscal year 2016.

The agency was supposed to make payments Thursday on credit lines held with Citibank and Scotiabank, but lenders agreed to extend the deadline to August 14 as officials continue to meet with US investors.

Also on Thursday, Puerto Rico's representative in the US Congress, Pedro Pierluisi, filed a measure that would allow the island's public corporations to seek federal bankruptcy protection under Chapter 9. 

Currently, US municipalities are able to file under Chapter 9, but Puerto Rico is barred from doing so.