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Puerto Rico Running Out of Economic Options

By: Frank Worley-Lopez - Sep 10, 2013, 11:38 am

The numbers are simply dreadful and the financial world is pulling the cord. A slew of reports from industry publications paint the picture of Puerto Rico’s economic disaster. (See here and here.) Seventy billion dollars in debt, plus 33 billion in underfunded pensions and a per capita debt that is ten times the average of the rest of the United States.

To make matters worse, the island’s official unemployment rate remains above 14 percent. About one third of Puerto Rico’s one million employed individuals work for the government. The remaining 650,000 work in the private sector, a number that is equal to just half of the total number of people living on food stamps.

A steady stream of residents are leaving the island for better shores, taking with them capital and skilled labor. So bad is the situation that unions are now asking the government to abandon a natural gas power plant program because it costs too much. This despite the fact that the islands main electrical supply comes from oil powered generators that have kept the cost of electricity high.

The message is clear, don’t spend money on new energy projects, fund the union’s pensions instead.

The Commonwealth had already instituted new tax proposals and cut thousands of government jobs in an attempt to balance the budget and bring the fiscal house in order. Those actions, taken by former Governor Luis Fortuño, led to island-wide strikes, civil unrest, and eventually his being tossed from office.

So how does Puerto Rico keep its bonds from dropping into junk bond territory? Right now, they are literally one step above that grade, with a falling population and a third of the workforce in the public sector?

Either Puerto Rico bites the bullet or it goes to Washington for a bailout. It’s not that easy, however. Washington has been disinclined to bail out Detroit and other cities, and with good reason. Once it helps one, it will be compelled to help all, and there is simply no way that can be done without abandoning what little fiscal responsibility is left in the US Capitol.

The United States has its own problems in the way of US$17 trillion debt and more than US$125 trillion in unfunded liabilities.

There is another part of the equation however: election politics. Can Congress reject a major bailout request from Puerto Rico, a Hispanic dominated territory in the run up to 2014 and 2016? Even fiscal conservatives may find their opinions swayed by video of widespread unrest that could occur should Puerto Rico bonds collapse, taking other bond funds and the government of Puerto Rico with them?

Either way, politicians have a history of taking the easy road and the easy road for Puerto Rico politicians is to first seek a bailout. Then, if they fail, they’ll be able to blame any future cuts and austerity on Congress’s refusal to act.

It will be tough to be a Congressman this fall.