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Last Updated on: 28th December 2020, 10:50 pm
The Puerto Rican debt disaster has again reared its ugly head. The ticking time bomb that is the Puerto Rico situation still has the potential to be an explosive mover for the yellow metal in the near future. These are all good reasons to include gold in your retirement accounts.
Puerto Rico Experiences Its Largest Debt Default So Far
Monday, May 2 marked the due date for the latest Puerto Rico debt payment. This also turned out to be the day that the American island territory could not cover $422 million worth of the debt that had come due. It is now the third time that Puerto Rico could not make its debt repayment date. What makes this one significant is that it is the largest one so far. Of the $422 million the island owed, they were unable to pay $370 million, about 88% of the amount owed. They could not repay any of the principle money due.
Puerto Rico continues to sound warning bells to the U.S. and international community about its rapidly deteriorating situation. The Governor Alejandro Garcia Padilla claims that he is paying the critical service salaries of police officers and teachers rather than Puerto Rico's creditors. He has referred to the crisis as a humanitarian crisis, all but calling it an economic emergency. The people of Puerto Rico have begun to abandon the island for the mainland in record numbers.
Puerto Rico Debt Exceeds $70 Billion
To say that Puerto Rico is drowning in its debt is no understatement. The small island economy owes its collective bond holders more than $70 billion. The governor has been sounding warnings that the island lacked sufficient funds to successfully pay creditors the upcoming amount due. Puerto Rican debt is like an avalanche. It will only get worse with time if not addressed. A case in point is that on July 1 Puerto Rico has another enormous payment due.
The island is holding on to hopes that Congress is going to take action on their situation before July. At the least, they need a temporary payment moratorium to give them time to work out some sort of a plan on the balance. For the moment, the worst part about the situation is that Congress does not seem to know how to respond to put out the raging fire.
An idea of how bad the situation is becoming in Puerto Rico comes from Governor Padilla. Their resources are so strained that even paying the fuel supplier for the police cars' and emergency vehicles' gas has become a real struggle. The island has a wish list for relief that includes a haircut on half of their debt.
Congress Playing with Fire
It is not that Congress is oblivious to the situation. They are slowly working their way through the final details on an assistance package for the island territory. The problem is that they can not yet come up with a final arrangement regarding oversight on which Puerto Rico will agree. Congress wants to establish an Oversight Board to manage the finances of the island for some unknown amount of time. They utilized an overseer like this when Washington D.C. went bust during the end of the 1990s.
Puerto Rico's officials and governor despise this kind of idea. The basis of their argument is that the island will forfeit its democracy when the members of such an Oversight Board can overrule decisions made by the island's own elected officials. Instead, they want either outright debt forgiveness, or a Chapter 9 bankruptcy. In such a bankruptcy arrangement they would be able to engage in debt restructuring. Detroit was allowed to use such a model with its debt crisis.
Congress is not budging for the moment though. Many members of Congress and creditors to the island point out that the territory has suffered from financial and political chaos for years now and needs an outsider to come in and clean house. This may be the only way for their credibility in the debt markets to be restored. The island's critics have a solid point. An audit for 2014 that the island began has never been finished.
Puerto Rico's Next Looming Debt Payment
May 2's default came on Government Development Bank issued debt. This is a subsidiary group of the government that promotes economic development. So far the island government has not yet defaulted on its all important General Obligation debt. The problem is that the upcoming payment for July 1st is $1.9 billion of this General Obligation debt.
Who Is Holding the Bonds?
An important question concerns the bond holders. Who is it exactly that is being defaulted on at the moment? Many of the island's retirees have been left holding the proverbial bag of bonds. The balance of the debt is owned by municipal bond funds and hedge funds on mainland Wall Street. For the moment, the sinking situation with these Puerto Rican government bonds has not negatively impacted the rest of the enormous U.S. bond market.
Some analysts are saying that it is a serious problem, but that it will not spread to the overall bond markets. They once thought that the tiny Greek economy and impending debt default would not bring the European Union to its knees either. Remember that it is never too late to include gold in your retirement holdings.