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
Stocks Bull Market Smoking Gun - 25th May 24
Congress Moves against Totalitarian Central Bank Digital Currency Schemes - 25th May 24
Government Tinkering With Prices Is Like Hiding All of the Street Signs - 25th May 24
Gold Mid Tier Mining Stocks Fundamentals - 25th May 24
Why US Interest Rates are a Nothing Burger - 24th May 24
Big Banks Are Pressuring The Fed To Losen Protection For Depositors - 24th May 24
Another Bank Failure: How to Tell if Your Bank is At Risk - 24th May 24
AI Stocks Portfolio and Tesla - 23rd May 24
All That Glitters Isn't Gold: Silver Has Outperformed Gold During This Gold Bull Run - 23rd May 24
Gold and Silver Expose Stock Market’s Phony Gains - 23rd May 24
S&P 500 Cyclical Relative Performance: Stocks Nearing Fully Valued - 23rd May 24
Nvidia NVDA Stock Earnings Rumble After Hours - 22nd May 24
Stock Market Trend Forecasts for 2024 and 2025 - 21st May 24
Silver Price Forecast: Trumpeting the Jubilee | Sovereign Debt Defaults - 21st May 24
Bitcoin Bull Market Bubble MANIA Rug Pulls 2024! - 19th May 24
Important Economic And Geopolitical Questions And Their Answers! - 19th May 24
Pakistan UN Ambassador Grows Some Balls Accuses Israel of Being Like Nazi Germany - 19th May 24
Could We See $27,000 Gold? - 19th May 24
Gold Mining Stocks Fundamentals - 19th May 24
The Gold and Silver Ship Will Set Sail! - 19th May 24
Micro Strategy Bubble Mania - 10th May 24
Biden's Bureau of Labor Statistics is Cooking Jobs Reports - 10th May 24
Bitcoin Price Swings Analysis - 9th May 24
Could Chinese Gold Be the Straw That Breaks the Dollar's Back? - 9th May 24
The Federal Reserve Is Broke! - 9th May 24
The Elliott Wave Crash Course - 9th May 24
Psychologically Prepared for Bitcoin Bull Market Bubble MANIA Rug Pull Corrections 2024 - 8th May 24
Why You Should Pay Attention to This Time-Tested Stock Market Indicator Now - 8th May 24
Copper: The India Factor - 8th May 24
Gold 2008 and 2022 All Over Again? Stocks, USDX - 8th May 24
Holocaust Survivor States Israel is Like Nazi Germany, The Fourth Reich - 8th May 24
Fourth Reich Invades Rafah Concentration Camp To Kill Palestinian Children - 8th May 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