Puerto Rico has long been an investor’s tax haven, particularly for US investors seeking to take advantage of the nation’s lower taxes. Yet a rising national debt has many investors concerned. And indeed, Time Magazine has predicted Puerto Rico as the ‘next financial catastrophe,’ explaining that the island is in “dire financial condition.” After decades of over-borrowing, Puerto Rico has accumulated a national debt of over $70 billion dollars, despite having just 4 million residents, Oscar Lopez reports for Latin Times.
Puerto Rico managed to sell off $3.5 billion in new debt, however, as Time explains, “the crisis still poses a danger to everyday U.S. investors.” As the magazine discusses, a group of U.S. investors, eager to take advantage of Puerto Rico’s triple-tax exempt bonds, meaning investors pay no federal, state or local taxes. As a result, today, around 70 percent of U.S. mutual funds own Puerto Rican securities. Yet with high unemployment and mass immigration to the US, recovering the debt is going to be a challenge.
“For years, Puerto Rico practiced deficit financing, which essentially means taking out long-term debt to cover short-term financial needs; this was created by too much spending relative to revenues,” says municipal bond market expert Chris Mier, chief strategist at Loop Capital. “This is unsustainable from an economic policy point of view in the long run, but since the ratings remained above investment grade, the buyers of the debt did not worry excessively,” says Mier.
However, now Puerto Rican debt has been heavily downgraded, to the point where it now sits below investment grade. This increases the risk of default or a debt restructuring: for a country that hasn’t balanced its budget in a decade, this may be a challenge. The result is a seemingly impossible paradox: “in 2013 alone, the government passed $ 1.36 billion in new taxes. While this increases the government’s revenue, it makes doing business on the island more onerous – which in turn further impedes economic growth.”
For the original report go to http://www.latintimes.com/puerto-rico-news-time-magazine-calls-caribbean-country-financial-catastrophe-159206