Thursday, August 6, 2015

Puerto Rico is approaching default

Greece is not only one which is fighting with the risk of default.

In June, Alejandro García Padilla, the governor of Puerto Rico, announced that its financial status was in peril, referring the possibility to damage the creditors. And his worry seems not a delusion. Public Finance Corporation (PFC) of Puerto Rico could pay only 628,000 USD, instead of 58,000,000 USD as the amount of duty to the bondholders. It is considered as the security in default.

The Economist: Puerto Rico doesn’t have the money

The amount of debt Puerto Rico is burdened 72 billion USD, fourfold as that of Detroit bankrupted in 2013.

There are some reasons why the debt has expanded. Public spending is deemed excessive compared to its economic magnitude. Education cost in Puerto Rico was increased by 39% over the past decade, in spite school enrollment was not going well. Some suggest the influence of globalization. Recently, the government was suffering from relatively high wage and low productivity. These structural issues resemble Greek crisis.

Business Insider: Puerto Rico has triggered the biggest municipal default in US history

Puerto Rico is not subjected to the Chapter Nine bankruptcy code in the US. In addition, International Monetary Fund can not help Puerto Rico, because it is not a sovereign country. These facts mean that it is quite difficult for external powers to alleviate the confusion with the default.

Some US politicians are willing to support Puerto Rico. Not a few Americans bought the bond of Puerto Rico, being fascinated by its low tax rate. The collapse of Puerto Rico economy will cause a bitter effect on the finance in the US.

Even if the default is avoided, restoration of Puerto Rico will be challenging. Strict austerity will be warranted for normalization of its economic status. However, such a harsh policy will interfere its economic growth. This dilemma is also the same as the current situation in Greece.

Nowadays, the default is no more a rare incident for not only a company but also a nation. Once happened, it can make global influence. We should prepare for the risk with international collaboration. Regular monitoring of financial status and the establishment of proper intervention procedure are desired, although no one knows how to recover the economic status with safe.

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