Could a Puerto Rico Default Hammer the $3.7 Trillion U.S. Muni Bond Market in 2014?

Larry McDonald, Forbes, January 3, 2014

As we head into 2014, you may be asking why we are concerned about a small island located in the Caribbean Sea, about a thousand miles southeast of Miami. Geographically, it is a mere speck on the map . . . practically irrelevant. In fact, 70 islands the size of Puerto Rico could fit comfortably into the state of Texas. However, the debt burden currently burying this economy may eventually send nasty tremors into the United States’ municipal bond market.

Surprisingly, of all the US muni bond funds, a staggering 75% of them are lending money to Puerto Rico, leaving millions of US investors and a large portion of US brokerage accounts exposed to this beleaguered little island. We suspect Puerto Rico will become America’s Greece. If swans could fly this far south, they would without question be the color of night.

2014 Tail Risk

Texas’s state government debt is relatively modest, near $40 billion, or $1,577 per resident. Puerto Rico’s public debt of $53 billion is nearly $15,000 per person, but when we add inter-governmental debt the mountain rises to $70 billion, or $17,500 per person. Throw in a violently under-funded pension and healthcare obligations, the noose approaches $160 billion. That’s $46,000 per person, enough to make one think about trying a swim for Miami.


Puerto Rico, a mere rectangle 100 miles long by 35 miles wide, the smallest and most eastern island of the Greater Antilles, is the 3rd largest municipal bond issuer after California and New York. That is a mind-blowing statistic. But Puerto Rican bonds are free from all State, Federal and local taxes, a very attractive investment for US investors with a thirst for yield. This is one side effect of low interest rates and quantitative easing coming out of the Federal Reserve; American investors have become this island’s great enabler from the north. Similar to 2007, when investors were reaching for yield in toxic subprime mortgage CDOs, today this song is playing again. This time in Spanish. A colossal reach for yield has enabled politicians in Puerto Rico to run up a dangerous bill, and the music is about to stop.

States with the Most Public Debt vs their Size of Population

California $99B vs 38 million people

New York $62B vs 19 million people

Puerto Rico $52B vs 3.6 million people

Credit Contagion; Toxic Side Effects

A default in Puerto Rico would re-price the entire $3.7 trillion US Municipal bond market, costing states and counties across America billions in additional interest rate charges. Once investor confidence is lost, it’s like losing personal trust, and becomes almost impossible to get back. So far Puerto Rico’s $52 billion pile of bonds were off 20 points in 2013, already costing US investors nearly $10 billion.

An unsustainable, systemic risk debt bomb has been formed. If there was a picture of moral hazard in the dictionary, Puerto Rico’s image would be right there next to Fannie and Freddie, the US government sponsored entities that already received a $180 billion bailout from taxpayers.


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  • Jesse James

    I say set the Puerto Rican’s free to make their own destiny. Viva La Libre de Puerto Rico!

    • IstvanIN

      get all the PRs to move to Florida and repopulate PR with Anglos and you would have an island paradise. The mild weather, although cold in the mountains and hot in the summer in the lowlands, would be a dream come true for neat, clean white Americans.

      • Jesse James

        Good plan, I have been urging the same plan for Haiti for about ten years now.

        • IstvanIN

          Haiti as two problems: deforestation and desertification, as well as the Dominicans next door..

    • Pro_Whitey

      Hell, I’d be willing to have the U.S. assume the debt if we can be rid of Puerto Rico. I also want to get ourselves out of all of our “territories” and “protectorates”. Having the Philippines as a territory eventually caused the Japs to attack Pearl Harbor. We could have done without the Philippines. The Spanish-American War was a huge error.

      • The Philippines wasn’t what did it for Japan. It was their war in China and the loathsome conduct of their army that did it. We stopped selling scrap metal and oil to Japan. The oil issue hit particularly hard, because without a steady supply of that, their fleet would be useless. In fact, their fleet was going to be useless by about 1943 anyway, even without a war and even without an oil embargo.

        Japan refused to sign the 1936 London Naval Treaty because they did not like the 5:5:3 ratio of major warship tonnage. This treaty would have been an extension of the earlier Washington and London naval treaties, which were intended to prevent an arms race. This treaty system allowed the United States a much smaller navy than our industrial power could obviously support, and thus actually favored Japan. When Japan refused to renew the treaty, this resulted in the US Naval Acts (authored by Georgia Democrat Representative Carl Vinson) of 1936, 1938 and 1940 which provided for the expansion of the US navy into a force so powerful that the Japanese navy would have been completely irrelevant, whether or not the Pacific War had started. Note also that it gave Japan a very limited window of opportunity for any remote chance of success in a war with the US.

        The US made no secret of our intention that the Philippines be independent in 1943. We didn’t want colonies; Cuba was given independence almost right away. Even earlier Philippine independence would have left us somewhat responsible for them, and we’re still not completely off that hook even today.

  • Funny, it wasn’t that long ago that all we heard from the Stupid Party was a whole bunch of yippie dippie doo over how PR elected a Republican territorial governor, he was implementing conservatism on the island, and the Stupid Party was finally on its way to being able to win the Hispanic vote.

    PRs have been pouring out of the island in droves since the starts of its recession seven years ago. Once the it hits the fan financially speaking, expect much of the island to clear out to make its way to wherever. Already, the main reason why Obama was able to eke out Florida in 2012 was because Puerto Ricans that have settled in the Orlando region were the deciding factor, and funny that, from a people that the Stupid Party told us not so long ago to celebrate for having elected a Republican governor. Hmmm.

    Also remember that a big part of PR’s economic “good times” until 2006 was really nothing more than American companies sourcing relatively useless work onto the island in order to be able to make a paperwork claim that their business is “based” in PR for the purpose of avoiding domestic corporate income taxes. (Even though PRs are American citizensand can get American welfare.) For instance, Microsoft had its plant
    to make official CDs and DVDs for MSFT software in PR (*), and that was the hook that it was legally able to use to divert at least on paper and for the consumption of the IRS as much of its mainland business as possible onto the island, to reduce its income tax liability on the profit that that business produces, thereby reducing its effective income tax rate to 7%.

    (*) – When was the last time you actually used an official MSFT CD or DVD? Exactly.

    • Daniel Schmuhl

      I remember when *Reason* magazine (libertarian rag) was carrying this story. Puerto Rico was setting an example for free markets and balanced budgets. What a bunch of naive fools.

      • Max Krakah

        Libertarians are totally discredited.

        • Daniel Schmuhl

          They’re basically just liberals who like markets for the most part. There is a small and vanishing minority of paleo-libertarians who get some of it right on race and culture.

          I think some of them are autistic. No country was ever built on the non-aggression principle or Austrian economic principles.

        • SoulInvictus

          None of the systems work in “pure” form.
          But as I don’t trust a strong central government, don’t want an enormous tax burden, don’t want to be entangled in foreign wars, do want my freedom and civil liberties, then both I and the founders lean towards libertarianism.
          Now I differ with them on (some) projects for the common good (so did the founders and that is the difference between anarchists and libertarians). Sane regulation, common defense, infrastructure, food inspection, etc.
          People like to tout those as examples of socialism, but having community programs on a national scale is not equivalent in any way to the kind of societies seen in historical socialist or communist countries.

      • SoulInvictus

        I’m not sure how enormous debt evidences a balanced budget.

    • Strider73

      In fact, PRs have been pouring into the Orlando region (especially Osceola County) since the mid-1990s. Long before the Diversity Depression began, parts of the city had become virtual suburbs of San Juan. Banco Popular (PR’s biggest bank) started putting branches in Orlando at least 12 years ago. They were supposedly fleeing the endemic drug culture on their island; of course, as Third Worlders always do, they simply brought that culture with them.

      • Max Krakah

        “Diversity depression”, that is good, that is gold, did you come up with that?

        • Strider73

          I may have coined the phrase, but I am certainly not the first to
          note that the meltdown was a direct result of liar loans to minorities
          (blacks in particular) who never had any intention of repaying them. In ghettospeak, “loan” translates to “free loot from whitey”.

      • r j p

        At least in Chicago,Banco Popular now goes by the name Popular Community Bank.

  • Max Krakah

    Hmmm. “States and Counties”…soooo, does that mean that the police forces will suddenly be off the payroll? Surely they are not going to cut education. OR is this going to mean that public sector pensions will suddenly be wiped out?

  • Max Krakah

    Fannie, Freddy then PR, the one two three knockout

  • bigone4u

    Puerto Rico, Detroit, and so on down the long list. Blacks and Hispanics practice voodoo thinking, believing that something can be conjured up out of nothing. Thus, none of them can manage money responsibly. Although they for the most part hate YT, they always look to us to bail them out, so they can get right back to partying. Enough! No more! Let them starve or get to work. They’re not getting another dime of my money even if I have to burn it on youtube to make a point.

  • Spartacus

    But I thought Puerto Rico had diversity, and as such was enriched by it ?

  • I have said it before, but I’ll say it again: anyone who has any exposure to the municipal bond market via a 401(k), IRA or other investment account ought to get out NOW.

  • MBlanc46

    We should have forced independence on these people forty years ago.

  • evilsandmich

    Yield chasers are betting that Uncle Sugar will step in with a bailout. Given that so many muni funds and TBTFs would take a hit, there’s worse bets to be made (not that I agree to be sure!). The debt coffin corner of excessive spending and excessive debt will wipe out all overleverged governments eventually with those which are most backwards first.

    • The positively hilarious aspect to municipal bond defaults is that these bonds are sold to fund lavish pensions for (black and brown) government retirees, who’s pension plan managers turn around and massively buy into these bonds. This is rather like the story about the dog and cat who ate each other completely up.

      The only way for the rest of us to win that particular game is to not play.

      • evilsandmich

        Indeed. When they built the local library the city issued bonds which were purchased by the police pension fund. Scams like that abound, so when the pensioners complain that bond holders should take the hit, not the pensions, they should be careful what they wish for (if indeed it matters at all since they’re one and the same).

  • IstvanIN

    Unrestrained immigration and unrestrained free trade have made any hope of making our brown areas economically viable. Wouldn’t it have been smarter to seal off the border with Mexico and not allow our manufacturing to go to China and allow the states and territories to compete for business with each other? Puerto Rico is just a symptom of where the entire country is going. We could jettison them tomorrow and the country would still be done for.

    • Jesse James

      I can’t help but notice that America has been de-industrialized in the same fashion that US Secretary of the Treasury, Henry Morgenthau, planned to destroy Germany’s ability to wage war or rebuild its economic power in the future by destroying its industrial capabilities and making it a mostly agricultural and subservient nation. Although the extremist who wished to destroy Germany forever as a civilized technological nation didn’t get their way much of their program to hamper German industrial recovery was put into partial action. It wasn’t until the Saar industrial region was finally returned to German control in the late 1950s that the last of the Morgenthau plan became history. Former President Herber Hoover spoke against the Morgenthau plan and helped convince the still mostly real American leadership of the US that implementing the full Morgenthau plan would require inexcusable crimes against the German people. In Hoover’s words,

      “There is the illusion that the New Germany left after the annexations
      can be reduced to a ‘pastoral state’. It cannot be done unless we
      exterminate or move 25,000,000 people out of it.”

      Fortunately for the German people and whites in general the Jewish plan for perpetrating genocide against the disarmed and prostrate German people was prevented by decent Americans. Morgenthau was from a prominent New York Jewish family and there is no doubt that his plans were based on a desire for vengeance and that he and those like him who supported his plans were willing to commit any crime against the Germans.

      Interesting that now our country has been largely de-industrialized and placed on a path for an impoverished and much diminished future. It is only speculation of course but it makes me wonder how much of what our economy and nation has suffered is really just the “slings and arrows’ of global competition and how much is the result of a deliberate conspiracy to weaken the greatest of the free white nations.

      • IstvanIN

        Morganthau wanted the Germans sterilized so they could breed.

        • I’m not aware of that, but he did want them helotized, forced into agricultural serfdom and forbidden to mine iron ore and coal. Not suprisingly, this announcement only made them fight harder. FDR should have publicly repudiated the Morgenthau Plan and fired the idiot on the spot; a rational belligerent power WANTS the enemy to be willing to surrender. This gets things accomplished with a lot less expenditure of blood and money.

      • jeffaral

        Morghentau had an even more sinister plan: he wanted to sterilize the Germans.

  • judenjager

    I read somewhere that about 50% of their population is on S.S disability..

    • Jesse James

      If so I imagine it is a result of staffing the local SSA offices with Puerto Ricans. Fox/Henhouse.

  • Truth Teller

    Every once in a while there is some sort of Puerto Rico independence from the eeeevil White USA movement. Whenever it came up one of my sisters had a great line of jokes on the order of how can I help, what do they need to gain independence etc.

  • Truth Teller

    Thank you Jesse James for linking the Morgenthau destroy Germany after WW2 plan to the de-industrialization of America. I have always assumed that the reason the Morgenthau plan did not go through was because the American capitalists wanted a showplace to contrast with the Marxist poverty of the Russian occupied nations of E. Europe.