Puerto Rico Munis Vs. Caribbean Austerity

Puerto Rico PREPAPhoto by Kurious (Pixabay)

Puerto Rican Municipal Bonds have been a hot topic of conversation in recent weeks. The government held a webcast on Tuesday to make the government’s financial situation more transparent and settle the nerves of investors. Yields on financial instruments have spiraled upward in recent weeks, reaching levels above those during the 2008 financial crisis.

Puerto Rico Munis Vs. Caribbean Austerity

Sterne Agee analysts Todd L. Hagerman and Robert Greene released a report on the economy and the debt of Puerto Rico to accompany the webcast. The analysts see some strong trends for the country’s bonds, but they feel the instruments are still at risk from the country’s difficult economic situation.

Puerto Rico bond easing

Government officials sought to ease the market’s nervousness about Puerto Rican bonds in the webcast. After the default of Detroit, municipal bonds in the United States look riskier. Puerto Rico has been in an effective recession for about seven years, and the government’s fiscal problems have not been solved despite attempts at austerity.

Governor Alejandro Garcia Padilla said of the bonds: “These are not just constitutional obligations, but also moral obligations.” The Sterne Agee analysts point out that Puerto Rico has strong legal structures in place to prevent it from defaulting. The clear statement from the government of the Commonwealth is another factor that lessens default risk in the country.

Puerto Rico bond default risk

The default risk in Puerto Rico’s bonds is still there, however. The country’s economy has shrunk by almost a fifth in the last five years, and government efforts to stabilize the budget have not been wholly effective. Puerto Rico may be able to avoid selling more debt on the capital markets in 2014, according to Sterne Agee.

The Commonwealth’s debt obligations stands at around $1.2 billion for 2014, a heavy burden compared to the expected revenue takings of $9.8 billion in the same year. Puerto Rican debt is strongly protected by the country’s government, and the statements from top officials help to reduce the risk of default.

There are still structural problems with Puerto Rican municipal bonds, but the country’s Government seems dedicating to protecting the reputation of the Caribbean island. Many large bond funds and investment banks, including UBS AG (NYSE:UBS) and Oppenheimer, are investors in Puerto Rican debt. The future of the Puerto Rican municipal bonds will have ramifications across the US economy.

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Paul Shea
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