Photo: Puerto Rico Treasury Secretary Melba Acosta (R) and Governor Alejandro Garcia Padilla at a press conference in response to S&P’s downgrade. (Source: Ustream)
Standard & Poor’s has stepped forward as the first major rater to strip Puerto Rico of its “investment grade” imprimatur. Puerto Rico is now officially speculative-grade credit and the most widely held junk bond in muniland.
Considering the economic fundamentals, the downgrade was inevitable. Economic indicators in Puerto Rico have been plummeting with sales of cement crashing 16 percent last year and gasoline consumption dropping 5.3 percent in the same period. Bank capital in Puerto Rico has declined 4 percent year over year as the commonwealth shakes off lingering problems from the housing bust.
Puerto Rico has essentially been in recession since 2006, when a special Congressional tax preference expired. It responded by borrowing heavily in the municipal markets. The borrowing drew future government cash flows forward, gave an immediate boost to the economy and created problems for later municipal leaders who must now juggle all these demands for repayment.
Today’s leaders are to be commended for facing this enormous problem head on. But this debt monster cannot be tamed with short-term fixes. It will take years to right the imbalances in Puerto Rico’s finances, let alone spur economic growth and repair a wrecked balance sheet.