Oct 28, 2018

Puerto Rico's unlikely financial bounceback

Felix Salmon, author of Edge

Puerto Rico was the poorest and most struggling part of America even before Hurricane Maria hit in September 2017. Its bonds had been in default for over a year, and were trading at around 60 cents on the dollar before the hurricane knocked them down to a low of less than 23 cents in December 2017.

Expand chart
Data: FactSet; Chart: Chris Canipe/Axios

Today, those bonds are back to their pre-hurricane levels, and Puerto Rican debt has proven to be 2018's top bond investment.

Very few people are happy about this development, beyond the distressed-debt specialists who own the bonds.

  • The back-of-the-envelope math is simple: If Puerto Rico has $70 billion in debt, and it gets paid off at (say) 71 cents on the dollar, that's $50 billion being sent off the island at precisely the moment that the Puerto Rican economy needs all the financial help it can get.
  • That $50 billion outflow will do nothing to help, and quite a lot to harm, the island's recovery from Hurricane Maria.
  • Puerto Rico will end up receiving about $82 billion of disaster relief money — much more than most people expected it would get, this time last year.
  • As ever, official disaster-relief sums dwarf charitable inflows: The Red Cross raised $72 million for Puerto Rico, including the value of donated goods. That's less than 0.1% of what's going to end up being spent by the federal government.
  • Trump has accused “inept politicians” in Puerto Rico of using disaster relief money to repay their debts. And though all disaster relief money is going to be used on disaster relief, it's certainly true that without the $82 billion coming in, there's no way that Puerto Rico could afford to spend $50 billion paying back its debts.

Puerto Rico needs that $50 billion, even after the disaster relief inflows. Its pension liabilities alone are more than $50 billion.

  • More than 40% of the population currently lives below the poverty line, including about 60% of children on the island.
  • Since the financial crisis, Puerto Rican GNP has shrunk by 20%, labor participation has hit a record low of 38%, and the island’s population has fallen by 10%.
  • Student enrollment has declined by more than 50% since its peak in 1980, and by about 33% in the past decade.

Puerto Rico has mind-boggling amounts of debt, given its size and the fact that its population is going to continue to shrink indefinitely.

  • The island's debt load is 55% of GDP, compared to a US state average of 2.6%. It’s also equivalent to 102% of state personal income, vs an average for U.S. states of just 2.9%.

The bottom line: Bondholders will always push to receive as much as they can possibly get. But Trump and the island's elected politicians are right to worry about money flowing out, just when Puerto Rico needs it most.

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