- Puerto Rico's financial condition continues to deteriorate.
- Puerto Rico faces a narrowing liquidity with its cash dwindling.
- Puerto Rico may be forced to seek a federal bailout.
In the 2008 financial crisis, major banks like Citigroup (NYSE:C) and Merrill Lynch were on the verge of collapse. We all remember that a taxpayer-funded bailout saved those financial institutions.
To avoid a wholesale financial collapse, Puerto Rico, a U.S. territory, may need a similar plan of assistance or some other type of intervention by Congress.
According to a Reuters article, Moody's reports that Puerto Rico faces "narrowing liquidity" as its "cash dwindles."
Government officials in Puerto Rico have attempted to make changes in policy and praise the lending environment, but those words have little to do with reality.
"In the past six weeks, Puerto Rico's junk-rated bonds have slumped while investment-grade municipals have rallied," writes noted economist and academic Arturo Porzecanski in a new essay.
Is Puerto Rico Heading Towards A Federal Bailout?"Investors have become pessimistic even though the Commonwealth has recently managed to borrow $900 million from a group of banks led by J.P. Morgan, Morgan Stanley and Bank of America," Porzecanski writes.
"The island's government was actually hoping to raise $1.2 billion, and it was granted at a punishing interest rate of 7.75 percent. In years past, the Commonwealth had always been able to obtain short-term credit for its seasonal needs at rates below two percent. According to Bloomberg News, the hedge funds which bought Puerto Rico's last bond issue in March - it was priced to yield an eye-popping 8.75 percent - have been losing confidence and have pared back their holdings."
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