4 Charts Of The Puerto Rican Debt Crisis That Will Blow Your Mind

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The long-anticipated Puerto Rican debt crisis just kicked into full gear…

how much does Puerto Rico oweIn late June, Puerto Rico Gov. Alejandro García Padilla warned the island’s debts are “unpayable.” He asked creditors to renegotiate repayment terms, but to no avail…

Puerto Rico revealed Aug. 3 it made only $628,000 (1%) of a $58 million debt-service payment that was due Aug. 1 – marking the largest municipal default in U.S. history.

Exactly how much does Puerto Rico owe?

The U.S. territory is $72 billion in debt.

Padilla said “it’s about math,” not politics, in a televised address regarding Monday’s default. He added island officials plan to develop a debt-restructuring plan to delay payments by “a number of years” by the end of August.

These four charts that put how much Puerto Rico owes into perspective…

How Much Does Puerto Rico Owe? A Debt Breakdown

Puerto Rico owes $72 billion as of Aug. 3, 2015. That’s $19 billion more than the U.S. territory owed in June 2008.

You see, the island’s economy began contracting in 2006. That led to the government borrowing large sums to cover budget deficits and operating expenses.

Much of the money has been sucked up by state-owned utilities. Additionally, a health insurance system for impoverished citizens that Puerto Rico created in the 1990s has also sapped funds – the government has yet to identify a source of funding.

Puerto rico

Why Puerto Rico Owes So Much: Dwindling Labor Supply

One major problem dragging down Puerto Rico’s economy is a lack of workers. Labor force participation (LFP) is currently 41% – roughly 20 percentage points lower than the U.S. average. That means only 41% of adult Puerto Ricans are employed or looking for a job, compared to 63% of the U.S. labor force.

Puerto rico debt

A major cause of the island’s low LFP is an ill-considered minimum wage hike. In 1983, Congress ordered Puerto Rico to equalize its lower rate with the federal figure.

But the result proved harmful…

According to a 1992 National Bureau of Economic Research analysis, the minimum wage hike “substantially reduced employment on the island.” It triggered a mass migration of suddenly unemployable lower-skilled workers to the continental United States. The Puerto Rican population has fallen by more than 7% over the past decade (273,000 since 2005). It is headed toward a 100-year low by 2050.

Puerto rico default

Inflated benefits have also discouraged labor participation. Even at the higher minimum wage, employees in Puerto Rico still get paid less than the combined package of welfare, Medicaid, and food stamp benefits for which a family of three might qualify, according to NY Post.

How Much Puerto Rico Owes Will Get Worse: Puerto Rico Debt vs. State Debt

Municipal bond debt per capita indicates the ability of local residents, through taxes, to support their government’s debt burden. And Puerto Rico has more municipal bond debt per capita than any American state…

According to Moody’s, Puerto Rico’s debt per capita of $15,637 is more than 10 times higher than the average debt per capita of the 50 states. It also:

  • Has the highest debt as a percent of personal income (87.5% in 2013, compared to a 3.1% average for the states).
  • Has a debt burden equal to nearly 95% of its economic output (compared to a median debt burden of 2.4% for the states).

Puerto rican debt

In the past, investors have routinely snapped up the territory’s bonds because they are tax-exempt and offer higher yields than other securities. But Puerto Rico’s ability to keep borrowing has decreased as investors seek extra compensation for the risk.

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The post How Much Does Puerto Rico Owe? 4 Charts That Put the Puerto Rican Debt in Perspective appeared first on Money Morning. Reposted with permission.

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