Puerto Rico is in big trouble. Its bond yields have risen to 8%-10% since May. Investors have been selling off Peurto Rican paper as they lost confidence in the self-governing American territory’s ability to meet its debt obligations. Rapid fund outflows and municipal unrest played a major role in Puerto Rico’s financial woes. Market concerns were soothed slightly after officials held a call to provide investors a better understanding of Puerto Rican budget dynamics.
Citi’s solution to Puerto Rico
Citi Research analysts Mikhail Foux and Vikram Rai said in a research note that there is a blueprint that Puerto Rico can use to alleviate market concerns. U.S. and European policymakers have successfully tested it over the past several years. The United States implemented the Temporary Liquidity Guarantee Program (TLGP) in 2008 and Eurozone launched Long-Term Refinancing Operations (LTRO) program in 2012. Both regions were successful in abating market concerns and addressing their liquidity needs in tough times. The program provided them with breathing room. Citi Research suggests the same strategy for Puerto Rico.
Puerto Rico can fix its problems, but….
If Puerto Rico introduces a similar program, it can restore investor confidence quickly. That will give the U.S. territory enough time to implement the recently launched reforms. Analysts say this solution is possible theoretically, but implementing it will be a big challenge for Puerto Rico, especially in the current political environment and dysfunction in Washington. History suggests that politicians rarely act until the stress mounts.
The island has net debt of $70 billion. American investors and municipal bond funds have flocked to Puerto Rico’s debt due to high yields. Its exemption from local, state and federal taxes attracted investors in high-tax states. That helped Puerto Rico keep attracting money at lower rates despite its poor economic conditions. But investors panicked when Detroit filed for bankruptcy in July. The threat of default by other governments due to poor economic condition prompted investors to withdraw their money, wreaking havoc in the Puerto Rican financial system.
