Puerto Rico Might Need A Federal Bailout Because It Can't Declare Bankruptcy

Puerto ricoREUTERS/Alvin BaezA pedestrian passes a closed shop with a for sale sign outside, along Paseo de Diego in San Juan’s Rio Piedras district, September 3, 2013.

Things are
bad in Detroit.
But they’re even worse in Puerto Rico.

The island’s economy, which is heavily dependent on tourism, has been hammered by the drop-off in U.S. discretionary spending in the post-financial crisis era.

We recently told you how residents have been leaving the country in droves. The territory’s unemployment rate is more than 13%.

Now, the yield on the Puerto Rican 5-year note has climbed to a staggering 9.4%.

As the New York Times’ Mary Williams Walsh notes, Puerto Rico cannot declare bankruptcy — just like a state.

The pension fund of the Northern Mariana Islands tried this last year — and failed. A judge ruled that as a “governmental unit” it was explicitly barred from filing for protection under Chapter 11, which applies to corporations. (The NMI’s lawyers themselves decided the territory was not eligible for Chapter 9, the bankruptcy statute Detroit and all cities and counties fall under.)

So some kind of bailout may be imminent, the president of the Puerto Rican Senate, Eduardo Bhatia, told her:

“[The administration is] wondering how they can help Puerto Rico send a very strong signal of stability right now…We are waiting for some sort of an announcement from the Treasury and the White House,” Bhatia said without clarification.

The Treasury Department referred our request for comment to the White House, which did not respond.

The island has $US70 billion-worth of bonds outstanding — nearly 4x as much as Detroit — because investors love the notes’ tax-free status. Bloomberg’s Michelle Kaske says 77% of muni-bond mutual funds hold Puerto Rican debt.

But the investors have begun freezing Puerto Rico out of the bond market, Williams Walsh says.

At this point, they are waiting to see whether austerity measures passed by Governor Alejandro Garcia Padilla administration, including a new corporate tax, a broader sales tax, and greater employee contributions to benefits, will pay off, Puerto Rico’s Nuevo Diario reports.

“There’s a little time left, but not much,” Janney managing director Alan Schankel told the paper.

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