Puerto Rico is slowly moving toward ending its debt crisis…
Exactly how much does Puerto Rico owe?
Currently, the U.S. territory is over $70 billion in public debt.
So far, the island’s new governor, Ricardo Rossello, has taken steps to close the chronic deficits in the two months he’s been in office. He immediately signed orders for agencies to reduce 10% of spending by the end of the fiscal year in June, Bloomberg reported on Jan. 3. And Rossello sounds committed to making cuts across the board until the U.S. territory is back on solid ground.
Liquidity moves markets!Click here to learn how you can follow the money.
“Once we get to our first budget, we’ll make even more adjustments and cuts,” Rossello said in an interview with Bloomberg, adding that an additional 10% of spending would later be cut. “We’re taking the immediate steps that are necessary,” he said.
Regardless of his efforts, the Puerto Rico debt crisis is still far from over.
The island skipped payments on a growing share of debt under predecessor Alejandro Garcia Padilla, who warned the island’s debts were “unpayable” in June 2015. In 2015 and 2016, Puerto Rico made payments on a small portion of its debt – but the struggling island still has a long way to go.
These four charts put just how much Puerto Rico owes into perspective…
How Much Does Puerto Rico Owe? A Debt Breakdown
Puerto Rico owes almost $70 billion as of March 2017.
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.
And “even with steps to address the deficit,” Rossello said in an interview in Washington last month, “the island will only have $800 million to $1.3 billion a year available to cover debts — less than half the more than $3 billion it will owe annually over the next decade.”
Why Puerto Rico Owes So Much: Dwindling Labor Supply
One major problem dragging down Puerto Rico’s economy is a lack of workers. The current unemployment rate in Puerto Rico is over 12% — more than twice that of mainland U.S. And labor force participation (LFP) is currently 41.20% – 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.
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.
Must See: This Great Depression-Era “Secret” Helped Transform Two Teachers into Millionaires. Read more…
Inflated benefits have also discouraged labor participation. Even with 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 the New York Post.
That lack of incentive to work has been a sort of “silent” contributor to the Puerto Rico debt crisis.
But perhaps the best way to illustrate the massive amount of trouble the island territory is in is to compare what it owes to the most debt-ridden areas in the continental United States…
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 2.6% 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)
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.
About Money Morning: Money Morning gives you access to a team of ten market experts with more than 250 years of combined investing experience – for free. Our experts – who have appeared on FOXBusiness, CNBC, NPR, and BloombergTV – deliver daily investing tips and stock picks, provide analysis with actions to take, and answer your biggest market questions. Our goal is to help our millions of e-newsletter subscribers and Moneymorning.com visitors become smarter, more confident investors.
Disclaimer: © 2017 Money Morning and Money Map Press. All Rights Reserved. Protected by copyright of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including the world wide web), of content from this webpage, in whole or in part, is strictly prohibited without the express written permission of Money Morning. 16 W. Madison St. Baltimore, MD, 21201.
Wall Street Examiner Disclaimer:Lee Adler, The Wall Street Examiner reposts third party content with the permission of the publisher. I am also a contractor for Money Map Press, publisher of Money Morning, Sure Money, and other information products. I curate posts here on the basis of whether they represent an interesting and logical point of view, that may or may not agree with my own views. Some of the content includes the original publisher's promotional messages. In some cases promotional consideration is paid on a contingent basis, when paid subscriptions result. The opinions expressed in these reposts are not those of the Wall Street Examiner or Lee Adler, unless authored by me, under my byline. No endorsement of third party content is either expressed or implied by posting the content. Do your own due diligence when considering the offerings of information providers.