“The events and effects following the downgrade of the bonds to junk status would be like the aftershocks of a severe earthquake … which will provoke three rounds of damaging impacts across the entire local economy,” the Advantage Business Consulting report warned.

“The effect on the psyches and morale of Puerto Ricans will be destructive, but the economic and financial effects will be even more grave,” it added.

While the report was prepared for the GDB in February 2009, its findings are taking on increasing relevance today as the island’s credit has been pulled down to one notch above junk status and a growing chorus is predicting a loss of Puerto Rico’s investment grade rating at some point this year.

Back then, the island’s credit was also a notch above junk rating, and the government was confronting a projected cash shortfall at the time of $2.4 billion. Today, the government is paying down a structural deficit of $1.6 billion with one-shot financing deals and says it plans to carry another $700 million structural deficit for 2014 fiscal year, which begins July 1.

The report said a junk downgrade would require closing the $2.4 billion gap right away, meaning the government would have to fire 60,000 employees, increase the 7% sales & use tax (IVU) to 18.5% or cut agency budgets by one-third. The government could also be forced to put up 100% collateral on its bonds, further squeezing the government financially.

While today’s values would be different, the report gives a clear picture of what is to be expected. It estimated a junk downgrade would chop the value of government bonds by 35%, which in 2008 would have cost local investment firms $2.4 billion, individual investors some $324 million and local banks more than $300 million, while further impacting the government’s wobbly retirement plans.

Meanwhile, the report estimated a decrease in government investment at the time of $2.6 billion annually, while the public payroll would shrink by $2.5 billion over two years.

“The reduction in employment and economic activity would provoke a marked erosion in the tax base, creating a situation of chronic fiscal strangulation,” the report concluded. “It could take the government from five to 10 years before recuperating its investment grade rating.”