What’s surrounded by water but has no liquidity?
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Yesterday in forgone conclusions:Â S&P downgradedÂ Puerto Ricoâ€™s debt rating to junk status toÂ (BBB-) (BB+). AsÂ BloombergÂ notes, yields on Puerto Ricoâ€™s debt had been trading at junk levels since September.
What Puerto Rico is struggling with, in S&Pâ€™s words, is liquidity; the agency noted that the island doesnâ€™t have affordable access to the debt markets. On Monday, theÂ WSJÂ reported that Puerto Rico is considering a $2 billion debt offering at rates of 10%, which is â€śmore than twice its yields on 10-year debt a year ago.â€ť Puerto Ricoâ€™s 10-year general obligation bonds are yielding 9.92%, per Thomson Reuters data.
Faced withÂ $70 billion in debt, Puerto Rico may have no other choice. â€śAfter balking at what they perceived as usurious rates back in the fall, PR officials appear to have resigned themselves to paying whatever it takes to get a financing done,â€ťÂ Triet NguyenÂ writes.
How did Puerto Rico get here? â€śEven as the islandâ€™s population shrank and the economy contracted 16% since 2004, the government kept selling enough bonds to saddle each man, woman and child with $19,000 in debt,â€ťÂ BloombergÂ wrote in October. That Puerto Ricoâ€™s debt has high yields and is exempt from Federal, state, and local taxes has helped — some 77% of muni funds own Puerto Rican bonds.Â Cate LongÂ calls the islandâ€™s bonds the most widely held junk bond in muni finance; Matt Zeitlin has more on those fundsÂ here.
With unemployment atÂ 15%, the island is also experiencing whatÂ Arian Campos-FloresÂ called a historic exodus, including a Â â€śa net loss of 54,000 migrants a year in 2011 and 2012 on an island of just over 3.6 million peopleâ€ť. Â In a nice explainer on the downgrade,Â Nuveen Asset ManagementÂ notes that you can count out a formal US bailout or a Chapter 9 bankruptcy — the former is unlikely and the latter wouldnâ€™t be legal under US law.
Whatâ€™s already happening, according toÂ Martin SullivanÂ of the Tax Analysts blog, is a backdoor bailout by the American government. In 2010, the island passed an excise tax on US companies that manufactured in Puerto Rico. But those companies were able to simply deduct taxes paid in Puerto Rico, technically a foreign jurisdiction, from their US tax bills. â€śIn effect, the new tax would be paid by the US treasury, not US companies,â€ť Sullivan says.
â€śIn other words, the American government moves tax revenue away from its own coffers and towards Puerto Rico’s, through the transmission mechanism of USA, Inc.,â€ťÂ The EconomistÂ writes. â€śThe only ones on the short end of the stick are U.S. taxpayers, who are footing the bill that they would probably be unwilling to pay if they were ever asked,â€ť Sullivan says.Â – Ryan McCarthy
On to todayâ€™s links: