Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24
RECESSION When Yield Curve Uninverts - 8th Sep 24
Sentiment Speaks: Silver Is Set Up To Shine - 8th Sep 24
Precious Metals Shine in August: Gold and Silver Surge Ahead - 8th Sep 24
Gold’s Demand Comeback - 8th Sep 24
Gold’s Quick Reversal and Copper’s Major Indications - 8th Sep 24
GLOBAL WARMING Housing Market Consequences Right Now - 6th Sep 24
Crude Oil’s Sign for Gold Investors - 6th Sep 24
Stocks Face Uncertainty Following Sell-Off- 6th Sep 24
GOLD WILL CONTINUE TO OUTPERFORM MINING SHARES - 6th Sep 24
AI Stocks Portfolio and Bitcoin September 2024 - 3rd Sep 24
2024 = 1984 - AI Equals Loss of Agency - 30th Aug 24
UBI - Universal Billionaire Income - 30th Aug 24
US COUNTING DOWN TO CRISIS, CATASTROPHE AND COLLAPSE - 30th Aug 24
GBP/USD Uptrend: What’s Next for the Pair? - 30th Aug 24
The Post-2020 History of the 10-2 US Treasury Yield Curve - 30th Aug 24
Stocks Likely to Extend Consolidation: Topping Pattern Forming? - 30th Aug 24
Why Stock-Market Success Is Usually Only Temporary - 30th Aug 24
The Consequences of AI - 24th Aug 24
Can Greedy Politicians Really Stop Price Inflation With a "Price Gouging" Ban? - 24th Aug 24
Why Alien Intelligence Cannot Predict the Future - 23rd Aug 24
Stock Market Surefire Way to Go Broke - 23rd Aug 24
RIP Google Search - 23rd Aug 24
What happened to the Fed’s Gold? - 23rd Aug 24
US Dollar Reserves Have Dropped By 14 Percent Since 2002 - 23rd Aug 24
Will Electric Vehicles Be the Killer App for Silver? - 23rd Aug 24
EUR/USD Update: Strong Uptrend and Key Levels to Watch - 23rd Aug 24
Gold Mid-Tier Mining Stocks Fundamentals - 23rd Aug 24
My GCSE Exam Results Day Shock! 2024 - 23rd Aug 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Why Puerto Rico Defaulted and Greece Did Not

Interest-Rates / Global Debt Crisis 2016 May 16, 2016 - 04:35 PM GMT

By: Michael_Pento

Interest-Rates

The Caribbean island of Puerto Rico is in the throes of a debt crisis that recently reached a breaking point when it missed a $422 million bond payment due May 2nd. When asked in a subsequent interview about the likelihood of making future payments on the remaining $72 billion of debt, Puerto Rican Governor Alejandro Garcia Padilla noted that the U.S. territory “does not anticipate having the money.”


Even a cursory review of Puerto Rico’s finances confirms Padilla’s claim of insolvency. The government is expecting deficits to grow from $14-$16 billion over the next five years, and for revenue to fall by $1.7 billion over that same five-year period. To makes matters worse the U.S. territory's unemployment rate is a lofty 12.2 percent.

The problem is simple:  Puerto Rico’s debt burden is equal to over 100% of its GDP when including the $43 billion worth of unfunded pension liabilities. This situation is exacerbated by falling population growth and perpetually shrinking GDP.

This is an unsustainable burden for the Caribbean island that is home to 3.5 million residents. To put this in perspective, if Puerto Rico were a state it would be similar in size to Iowa, which carries a comparatively meager $15 billion in public debt and a debt to GDP ratio of just 11%. In fact, even big spending states such as New York only carry a debt to GDP burden that is just 25%. 

Puerto Rican debt has been the darling of Hedge Funds and financial advisors for years because of the desperate search for yield that has been exacerbated by the Fed’s ZIRP and by the government’s triple tax-free status of its bonds.

Sadly, this debt story has been told before. Politicians, lured by power, convince citizens that economic prosperity comes from debt-fueled government spending. But when the promised growth never materializes tax payers are saddled with debt payments that far transcend the tax base.

The Island’s coveted tax-exempt status, coupled with no requirements for a balanced budget, allowed Puerto Rico to ignore the fetters of typical state spending and encouraged them to follow the fiscal policy of Greece.

When Greece adopted the Euro back in 2001 the prestige of a stronger currency enticed them into taking on debt beyond what their tax base could support. 

In 2010 Greece began to experience its own crisis of confidence in the government’s ability to pay back its enormous debt load that had climbed to nearly 150% of GDP. This caused bond yields to become intractable; by 2012 the yield on the Ten-year Note ballooned to over 40%.

Then, assurances made by the ECB President, Mario Draghi, to do whatever it takes to bring down borrowing costs eventually brought rates back down to earth. And they have remained relatively quiescent ever since; despite Greece’s debt to GDP ratio hovering around 180% for the following three years after the bond market collapsed.

The fact is compared to Greece Puerto Rico is in better financial condition; it has a much lower debt to GDP ratio and has similar demographics and growth. So why does the Greek Ten Year Note yield just 7.5%? In comparison, $422 million of securities sold by Puerto Rico’s Government Development Bank recently displayed a yield of 1,600%. So what is the reason for the trenchant difference in borrowing costs?  The answer is simple: Puerto Rico cannot print their own currency and it does not have a central bank willing to monetize the debt.

This yield differential supports the theory that the current $8 trillion worth of negative yielding global sovereign bonds would be displaying yields significantly higher. In fact, if global investors were not convinced that central banks would always supply a bid for sovereign debt the bond yields of Japan, Europe and the U.S would be closer to those of Puerto Rico, or at least Greece circa 2012. This is because not only do these nations have a debt to GDP ratio that is higher than Puerto Rico, but also because they share similar faltering growth patterns.

The simple fact is a nation does not ever have to repay its debt; but must always convince bond holders that it has the ability to do so. And without a viable tax base all these nations have to lean on is the printing press. The sad truth is without continuous central bank intervention the yield curve for the entire sovereign debt complex would spin inexorably out of control. This is the real reason why central bankers are panicked about deflation and have inextricably inserted themselves into financial markets.

Michael Pento produces the weekly podcast “The Mid-week Reality Check”, is the President and Founder of Pento Portfolio Strategies and Author of the book “The Coming Bond Market Collapse.”

Respectfully,

Michael Pento
President
Pento Portfolio Strategies
www.pentoport.com
mpento@pentoport.com

Twitter@ michaelpento1
(O) 732-203-1333
(M) 732- 213-1295

Michael Pento is the President and Founder of Pento Portfolio Strategies (PPS). PPS is a Registered Investment Advisory Firm that provides money management services and research for individual and institutional clients.

Michael is a well-established specialist in markets and economics and a regular guest on CNBC, CNN, Bloomberg, FOX Business News and other international media outlets. His market analysis can also be read in most major financial publications, including the Wall Street Journal. He also acts as a Financial Columnist for Forbes, Contributor to thestreet.com and is a blogger at the Huffington Post.
               
Prior to starting PPS, Michael served as a senior economist and vice president of the managed products division of Euro Pacific Capital. There, he also led an external sales division that marketed their managed products to outside broker-dealers and registered investment advisors. 
       
Additionally, Michael has worked at an investment advisory firm where he helped create ETFs and UITs that were sold throughout Wall Street.  Earlier in his career he spent two years on the floor of the New York Stock Exchange.  He has carried series 7, 63, 65, 55 and Life and Health Insurance Licenses. Michael Pento graduated from Rowan University in 1991.
       

© 2016 Copyright Michael Pento - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Michael Pento Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in