Puerto Rico is not Greece

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Puerto Rico defaulted on its debt by paying only a fraction of what was due on bonds due August 1.

According to Reuters, Puerto Rico’s Public Finance Corp paid only $US628,000 of a $US58 million payment due on its Public Finance Corp bonds on Monday.

This follows Puerto Rico Governor Alejandro Garcia Padilla’s June announcement that the island’s debt — $US72 billion — was unpayable and required restructuring.

Since then, investors and Americans in general have been worried about the aftermath of Puerto Rico’s default — and what it means for them — especially considering all of the hoopla surrounding Greece’s economic problems.

Indeed, some commentators have even drawn comparisons to Greece, which has brought turmoil to Europe and the global financial markets. Greece is looking for a bailout after experts increasingly worried that the country may leave the euro in what has been dubbed a “Grexit.”

But “these fears should be downplayed,” according to Bank of America economist Ethan Harris. Harris recently wrote in a research note to clients:

As far as contagion effects go, Puerto Rico is missing virtually all of the broader geo-political and humanitarian implications of a ‘Grexit.’ It is, therefore, difficult to see a Puerto Rico default as a significant source of contagion that would materially impact the Fed’s policy decisions. The risk of global contagion from Grexit, while apparently low, arguably looms larger on the Fed’s radar — it has been cited as a risk to the outlook several times in this year’s FOMC minutes; Puerto Rico has not once been cited.

Harris also adds that Puerto Rico’s problems have been bubbling up for some time now, so they shouldn’t come as a huge surprise for the markets.

“While certain individual investors may find themselves exposed to potential losses as Puerto Rico restructures, we do not see this as a systemic risk event, nor as a bellwether of potential crises elsewhere in the US municipal debt market.”

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