Domino effect: Puerto Rico debt crisis to have major impact on US economy – expert

16 October, 21:120

Domino effect: Puerto Rico debt crisis to have major impact on US economy – expert

Photo: Malkav/flickr.com

Puerto Rico, the US territory which homes some 4 million people, is struggling through the seventh year of recession. US bond insurers MBIA and Assured Guaranty are facing hard times amid predictions that Puerto Rican credit rating may be downgraded one or two categories. The experts say it might lead to the default. Vivianne Rodrigues, a Financial Times US capital markets reporter and former FT Tilt Latin America bureau chief, in an interview to Voice of Russia talked about the situation in Puerto Rico.

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Ms Rodriguez started by explaining why the current situation in Puerto Rico appears so desperate. She said the territory has been in the recession for many years now, and to fund itself, Puerto Rico issued a lot of debt and these bonds ended up being part of many portfolios in the US. Puerto Rico, being a territory of the US, is tax exempt. Tax-exempt bonds mean that people don’t pay taxes on these assets, and they are very popular throughout the US.

“So, now basically 80% of all municipal bond portfolios in the US carry some sort of exposure to Puerto Rico debt. So, if the territory really has a problem paying its debt, it is really going to hit hard the US markets,” – Ms Rodriguez explained.

Ms Rodriguez pointed out that the shutdown doesn’t affect Puerto Rico directly. She said it is a complicated situation “for the US to just step in and provide some sort of assistance,” because just several months ago, the city of Detroit, a very large city in the US had to file for bankruptcy. The Federal government didn’t intervene in that case.

“So, how could the government potentially explain the direct intervention or assistance in the form of money, for example, in Puerto Rico, if it didn’t intervene in the city of Detroit? So, it is a very difficult situation to explain for US tax payers,” – MsRodriguez said.

260 million is pledged to combat drug-related crime in Puerto Rico, which is among the main types of crime there compared to the 1.6 billion that is pledged to Mexico. Explaining the reasons behind that, Me Rodriguez said that it indeed is a “very different budget, but also the scale and the size of reported drug activity in Mexico is higher, even though Puerto Rico is an incorporated territory of the US, it does not border the US as Mexico.”

“So, the border aspect is very big. So, it really impacts the situation in the southern part of the US. That is why there is the big difference in the assistance for that particular factor of drug trade.”

Summing up her talk, Ms Rodriguez said that though the shutdown is not helping the situation, “ultimately the domino effect is more on financial markets. Many US banks, many US investors, and US companies have a lot of investments and activities and some sort of exposure to Puerto Rico. So, if the commonwealth really has problems paying debts, we are going to see this really having an impact here in New York for example. We don’t know how big the exposure is of large US banks for example to Puerto Rico.”