Cyprus in the Caribbean

Could Cyprus happen over here?

Many folks look at their problems and say, “Nah.” We don’t have an outsized banking system mostly funded by foreigners, and we’re working with our worst problems. Meredith Whitney was wrong; the muni market didn’t see dozens of major bankruptcies with hundreds of billions of losses, right?

Well, maybe.

One glaring issue in an otherwise sound municipal credit universe is Puerto Rico. The Commonwealth has a population of 3.7 million, of which only about a million have jobs, and over 40% of which lives below the poverty line. Its public debt is enormous: almost $68 billion, or more than $18 thousand for every man, woman, and child. By contrast, the most indebted US state, Connecticut, has $5400 per person in debt.

But the main problem in Puerto Rico is the pension system. Many states have underfunded their pensions—New York by 10%; Massachusetts by 27%; New Hampshire by 42%, which is pretty bad. But Puerto Rico’s pensions system is 93% underfunded, and probably will run out of cash sometime in 2014. When that happens, look out!

Because Puerto Rico bonds are tax-exempt in all 50 states, they are widely held in many state-specific and national tax-free mutual funds. But the Commonwealth’s fiscal difficulties have them dancing with a downgrade. Both Moody’s and S&P have PR on the edge of a junk bond rating; if they do become non-investment grade, there will be a lot of soul-searching and forced selling by muni investors. Is Puerto Rico too big to fail?

Any default is unlikely—the Commonwealth is constitutionally required to satisfy their debt obligations before paying anyone else. The problem is that over 40% of the labor force works for the government. Are they going to stand in line behind Nuveen and Fidelity? And if the island does default, it will shock the financial world.

Think Cyprus can’t happen over here? Think again.

Douglas R. Tengdin, CFA

Chief Investment Officer

By | 2017-07-17T12:34:42+00:00 March 25th, 2013|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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