Wall Street Waits While Statehood Debate Handcuffs Puerto Rico Decision Makers

Puerto Rico has become much more than a vacation destination for anyone who invests their money on Wall Street, plans for retirement using pension funds, or even pays taxes. As the commonwealth continues to suffocate under the weight of nearly $70 billion in outstanding debt, a debate about whether Puerto Rico will become the 51^st state has become less about the number of stars on the United States flag and more about the staggering losses facing those exposed to the territory.

While government officials grapple with strategies for addressing Puerto Rico’s massive debt load, they are left paralyzed by the inaction that stems from the fear that a step toward addressing the financial crisis would tip the balance either toward or away from becoming a state.

Flag of Puerto Rico (Photo credit: Wikipedia)

For evidence of the conundrum you can look no further than the decision-making related to accepting tax breaks from the continental US to boost revenue. One of the earliest sparks for Puerto Rico’s financial demise was lit in 1996, when President Bill Clinton repealed the legislation that gave tax incentives for US companies to locate facilities in Puerto Rico.

But because those tax breaks are perceived as a hurdle to statehood, Puerto Rico Resident Commissioner Pedro Pierluisi – a non-voting member of Congress and a member of the pro-statehood New Progressive Party – would not advocate for the return of the aid, even if they could help balance the budget.

A related wrinkle comes into play as the market debates the benefits of a federal bailout. Yes, a bailout would be expensive for US taxpayers; but Puerto Rico’s default could be far more disruptive than Detroit’s record bankruptcy, experts tell Debtwire.

Lastly, indecisiveness on the issue impacts what could be the most efficient mechanism to remedy the financial woes. With Puerto Rico being a territory and not a municipality, it cannot even file for bankruptcy according to federal law. This means that any type of debt restructuring would unfold in an uncontrolled way a la Greece or Argentina.

The statehood stalemate could have a devastating effect on Wall Street if it also results on a standstill over how to balance the budget and also keep up with debt obligations.

Puerto Rico and its various public agencies have issued $70 billion of debt in the tax-exempt municipal bond market, which has been picked up by state-specific bond funds across America. Today around 70 percent of US mutual funds own Puerto Rico securities, according to Morningstar.  These funds were looking to increase their yield with the commonwealth’s bonds, which are exempt from state, local and federal taxes. As Puerto Rico entered a severe financial crisis and its bonds were eventually downgraded to “junk” status, prices tanked and investors have lost as much as 35% of their holdings.

With the territory stuck in limbo, the fact of Puerto Rico’s public corporations stepped into focus last week when the governor surprised the market by presenting a last-minute bill that would provide an avenue for restructuring to public agencies and utilities but not to the commonwealth itself.

Maryellen is a senior reporter covering Puerto Rico, Michigan, and the utilities sector for Debtwire Municipals.  Ellie is a reporter following Puerto Rico, California, and public pensions.  Maryellen and Ellie can be reached at Maryellen.tighe@debtwire.com and ellie.ismailidou@debtwire.com, respectively.

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By Maryellen Tighe and Ellie Ismailidou

Wall Street Waits While Statehood Debate Handcuffs Puerto Rico Decision Makers