Puerto Rico Says It Will Default on Some Bonds


#1

nytimes.com/2015/12/31/business/dealbook/puerto-rico-says-it-will-default-on-some-bonds.html?_r=0

This has been expected for some time, but it is still a problem for the troubled island. It will make life for anyone who chooses to remain there more difficult, and therefore causes more residents to leave. That accelerates the downward spiral as has happened in major US cities like Detroit (if it still qualifies as a major city), and Greece. With interest rates now starting their long expected rise, any solution will be more difficult.

Can this be contained, as the Federal Reserve once said about sub-prime mortgages (wrongly!!!), or will it spread to other troubled jurisdictions like Chicago? Is it time to buy a farm and a gun? Stay tuned.


#2

I would argue that Puerto Rico is too small to have much significance one way or another. They have a Gross State Product of about $100 billion which is tiny in the context of a $17 trillion economy.


#3

Puerto Rico has the same problem that the US government has, much, too much, borrowing and spending. Voters need to wise up and stop voting the Big Spenders into office.


#4

That will never happen as long as we keep electing democrats and republicans.


#5

I agree that Puerto Rico is too small to matter much by itself, but that is what we were told about sub-prime mortgages. If the government chooses to bailout some, it inevitably will choose to bailout others to make the bailout politically possible.

This default will also raise the price of bond insurance and rising interest rates will be a further problem for the State of Illinois. They tried to fill the huge pension gap by assuming a better investment return for their pension funds, but the stock market was flat this year, so they missed their target and now have a bigger hole to dig out of. A bigger hole may mean even higher taxes and more businesses and citizens leaving for lower costs of living.

Do you trust politicians to change the way they deal with problems? I don’t.


#6

I think the problem with the financial crisis is that the bankers across the board ended up taking excessive amounts of risk and when they did that everything came crashing down all at once. Subprime was just a small piece of it. Now, the question with PR is whether this will have any contagion effects. I would argue probably not, since everyone has known that PR has been a basket case for years.


#7

The gun is probably a good bet. They retain value remarkably if they’re quality guns. :slight_smile:

The farm is a little more doubtful. Grain and beef prices are both greatly down from two years ago.

I do understand your point, but I just wanted to have a little fun with it.


#8

I haven’t been a bond buyer for years. If I wanted to be in that market, I would want to buy the bonds originating in a state whose political subdivisions are prohibited from borrowing without voter approval of the borrowing and a special tax to retire them. Such places usually issue things like TIF bonds when they already have the commercial enterprises committed.

Why bankers or anyone else would want to buy a PR bond is beyond my comprehension.
Well, or any bond in a jurisdiction that allows political subdivision borrowing without voter approval and a clear method of financing them.

My state doesn’t allow deficit financing at all on the state level, and states that allow it make me nervous.


#9

I have a friend who had a farm, horses, dalmatian dogs, traded in furs, and was a gun dealer. He should have been on top of the world. Then his wife divorced him after 27 years of marriage, and his 130 year old farm house burned to the ground. He moved to Missouri. I hope he has better luck in your state.

He also had a picture of President Obama on one of his gun cabinets. Above it was the title, “Salesman of the Year”.


#10

Hard to know about the farming part of it. But as a gun dealer, he ought to do pretty well.


closed #11

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