The beautiful island of Puerto Rico has defaulted on their $70 million of municipal debt.
An oversight board pushed through a proposal that will give bondholders a 70% haircut. (It should be renamed an “afterthought” board).
Their debt is now priced at $62.50 (out of $100 par), a steep discount.
Yes, Puerto Rico’s debt was selling nearly at par as late as 2014, but has plunged dramatically as hopes for a sensible solution fade away.
The problem? Puerto Rico has significant social expenditures despite a declining population (not unlike Chicago). Puerto Rico’s population has been falling since 2004, yet its debts were trading at near par until 2014.
And Puerto Rico’s unemployment rate is 12%. Compare that to the US U-3 unemployment rate of 4.7% and theU-6 underemployment rate of 9.2%.
Puerto Rico demonstrates the problem of government promising social programs and retirement benefits (take California’s and Illlinois’ pension problems as an example). Particularly when you have a declining population.