MSG Team's other articles

9669 How Securities are Priced in the Primary Market

We already know that primary financial markets are used by firms to raise funds from investors. This is done by issuing shares via an initial public offer, rights issue, or even using private placements. In each of these cases, the firm selling shares has to arrive at a market price at which they are willing […]

10122 The Kraft – Heinz Fallout

Kraft foods and Heinz, two Fortune 500 giants, merged in 2016 to form one of the largest companies in the processed foods space. More than 50% of the shares of this company are owned by Warren Buffet’s Berkshire Hathaway and Brazil’s 3G Capital. The two giants had merged together in order to implement a ruthless […]

11040 Risks Associated with Remote Deposit Capture

The usage of remote deposit capture has been increasing rapidly in the recent past. This is because the technology is convenient and also because check processing became very difficult during the lockdowns which were induced by the coronavirus pandemic. As a result, corporations were forced to deploy remote deposit capture machines in order to continue […]

12059 The Wow Airline Debacle

The Icelandic budget airline “Wow airline” became the latest airline to go bankrupt in Europe. Of late, Europe has seen a lot of airlines go bankrupt due to multiple reasons. No less than eight airlines have suspended their operations in Europe in the past year. Price wars, rise in fuel prices, and overcapacity have been […]

12842 The Components of an Investment Bank

As mentioned earlier, investment banks have been in operation for several years now. This is the reason why, for many years, they have been involved with almost any deal which includes large sums of money. The operations of investment banks have become very diverse over the years. This is the reason that investment banks are […]

Search with tags

  • No tags available.

The high indebtedness of the United States of America is well known. However, USA is still considered to be an economic superpower and its economy even in the faltering state is better than many countries. However, of late Puerto Rico, an American state in the Caribbean islands has revealed information that communicates financial distress.

The Puerto Rican governor Alejandro Garcia Padilla has told the media that the $72 billion accumulated by the Puerto Rican government as debt is simply not payable. He goes on to state that the Puerto Rican debt crisis is not a political problem. Rather it is simply a mathematical problem wherein the numbers speak for themselves. Governor Padilla has referred to the recent rising debt figures as a debt spiral that has gone out of control.

This has prompted many journalists to sensationalise the issue and nickname Puerto Rico as a Greece within America since its government has borrowed unimaginable amounts of money without any plausible plans to pay it back.

The Puerto Rican Situation

Puerto Rico has $72 billion in debt. This may not seem much as there are many states which have much larger debt figures in absolute terms. The Puerto Rican population is about 3.4 million people. This means that the per capita debt in the region amounts to an astounding $20,400.

Puerto Rico is not an area where wages are very high. Therefore, the debt amounts to an astounding 69% when compared to the GDP. To put this debt into some sort of context, the average Puerto Rican makes fewer wages than the average American worker but has a debt burden which is over twice the national average!

One argument cited was that since the Puerto Ricans do not have to pay federal income tax they can afford to pay a higher percentage of their income as taxes. However, when the government tried to implement these increased taxes, it faced a mass exodus of people. Many people have left the island and settled in mainland America in the hope of better economic prospects. Hence, the government finds itself cash strapped, struggling to make any payments on its debt.

Credit rating agencies like Standard and Poor’s have projected a very bleak economic outlook for Puerto Rico. This can be gauged from a CCC- rating with a negative outlook that they have given the island state. This rating is the same as what S&P’s has given to Greece. Therefore, in a way S&P does think of Puerto Rico as a Greece within America! To top it up, Puerto Rico does not have the option of filing bankruptcy and therefore is unable to get out of this situation. This is what has prompted Governor Padilla to bring the issue to the notice of the media and create some sort of political pressure.

What Caused The Puerto Rican Crisis ?

The Puerto Rican crisis has been created by misguided attempts of the government to benefit the people. The Puerto Rican government, in its bid to create employment started providing extensive tax breaks to many companies. Enticed by these breaks, many companies did set up shop in the island state. The Puerto Rican people got accustomed to good employment opportunities that the presence of multi-nationals brought along!

However, a few years later the Federal government cancelled the special tax breaks that were being given to companies in Puerto Rico. As a result, many companies simply left the state and employment opportunities started dwindling.

The Puerto Rican government took populist measures to control this crisis. They simply started borrowing more and more and spending it to keep the economy afloat. The jobs lost as a result of companies moving out were created because of government’s massive spending on infrastructure. Soon, the Puerto Rican government ran out of other people’s money and found itself in a situation wherein lenders were no longer willing to extend credit on favorable terms and downgrades by credit rating agencies became a routine activity!

Austerity Measures and Unemployment

The Puerto Rican government has been forced to take extreme steps in the opposite direction in order to make good the loss that it has caused. Thus, all its infrastructure spending programs have been severely rolled back if not downright shut down. This has caused rampant unemployment in the island state. The unemployment rate in Puerto Rico is also twice the national average and hovers somewhere around 14%! Thus, instead of rescuing the average Puerto Rican from economic fallout, the policies of the government have ended up making the effects more severe.

Moreover the taxation rates have been increased on the limited income that is being made by the workers in this island state. The welfare spending has also been negatively affected, and the government is on the verge of complete economic fallout just like the Greek government.

A default by the Puerto Rican government is also expected to lead to hiccups in the sale of bonds by other states to finance their debt. Also, it will end up setting the wrong precedent if America allowed its states to borrow beyond limits and just default on their obligations. How this crisis will be handled by the biggest economic superpower on earth is yet to be seen.

Article Written by

MSG Team

An insightful writer passionate about sharing expertise, trends, and tips, dedicated to inspiring and informing readers through engaging and thoughtful content.

Leave a reply

Your email address will not be published. Required fields are marked *

Related Articles

Currency Wars: “Beggar Thy Neighbor” Policy

MSG Team

Cryptocurrencies and Taxation

MSG Team

Common Terminologies Used in Forex Markets

MSG Team