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Time for Puerto Rico to Start Making Tough Decisions

By: Frank Worley-Lopez - Dec 10, 2013, 5:00 pm

Another week brought another slew of finance articles on the economic fragility of Puerto Rico. The island’s US$70 billion dollar, $30 billion in unfunded pensions, and high paying bonds have financial advisers and writers alike keeping a close eye on the island’s situation.

One article asked, “Is Puerto Rico Sinking?”

While all eyes have focused on Detroit’s record bankruptcy, an economic crisis is deepening in Puerto Rico that many experts say may be far more harmful to the U.S. economy.

Puerto Rico has been mired in economic recession for almost eight years, with public debt skyrocketing to $70 billion and unemployment climbing to 14 percent, 4.3 percent higher than that of any U.S. state. The island’s debt load accounts for 93 percent of its GDP.

Meanwhile, Forbes focused on Puerto Rico’s recent “scoop and toss” move to realign its precarious debt situation:

Puerto Rico engaged in a municipal bond maneuver called “scoop and toss.” (And no, New Yorkers, this isn’t the kind of scoop-and-toss you do with your dogs during their morning walks around Manhattan.)

This bond “scoop and toss” involves selling new long term debt to raise funds to pay off maturing bonds, effectively extending the timetable for retiring municipal borrowings. Such refinancing, according to the Journal, aims to reduce interest rates but typically keeps the same maturity schedule.

The Forbes article, along with a Wall Street Journal piece, focused on concern that despite the rearranging of debt, the US Commonwealth may still have trouble paying off the debt in the long term. That concern brings inevitable comparisons to the recent City of Detroit bankruptcy, but another article goes even farther. Seeking Alpha questioned if the future of Puerto Rico resembles the Lehman Brothers collapse that led to the 2008 financial crisis. Puerto Rico has yet to fully recover from that crisis.

Puerto Rico, a US territory, is teetering on the edge of financial collapse.

The island’s plight is reminiscent of the 2008 collapse of Lehman Brothers, whose bankruptcy filing led US regulators to examine similar banks that were considered “too big to fail.”

Unlike Lehman or the City of Detroit, which just filed for bankruptcy, Puerto Rico, like the 50 states, cannot go bankrupt. But that doesn’t mean it won’t default on its $70 billion in municipal debt

Even Fox News commentator and Puerto Rican Geraldo Rivera jumped on the bandwagon with his aptly named article, “Que pasa Puerto Rico” on Fox News Latino:

Puerto Rico and Detroit; despite their obvious differences, the Caribbean Commonwealth and the Midwestern Motor City share awful economic and social burdens. Both governments are broke, crippled by staggering debt and unemployment. Crime is rampant and residents are deserting their sinking ships.

In a move to find solutions, the Obama Administration developed what is being referred to as an economic SWAT team on the island. That team is working with the local government while the governor works hard to block a bill that would address Puerto Rico’s status and is currently making its way through Congress. While one might be tempted to urge Governor Alejandro Garcia Padilla to focus on more pressing issues instead of blocking a bill that would call for an up or down vote on statehood, statehood status may very well be the linchpin for the island’s economic future. The Commonwealth as it stands, however, won’t be a part of that future.

While statehood would bring more federal dollars to the island, independence would bring more economic and political freedom to find long term solutions to the island’s problems. Either way, it is high time for Puerto Rico and the United States to decide whether they will part from each other or be partners on the world stage.