A couple of months ago when the press began its aggressive coverage of the Puerto Rican municipal bond market, default was never an option. However, Justin Vélez-Hagan, executive director of The National Puerto Rican Chamber of Commerce has called it inevitable. The Chamber of Commerce official has cited more than 10 facts for his opinion: 1) $70 billion of debt is now held by institutional investors and mutual funds; 2) the debt-to-GDP ratio is now nearly 70% and growing; 3) including pension obligations the debt-to-GDP ratio exceeds 90%; 4) the per capita debt load is $19,000 per person on this tiny island, which is many multiples over the debt load in any state; 5) the eight-year recession has contracted the economy by over 16%; 6) the 2014 budget deficit is estimated between $300-$800 million; 7) the repeal of IRS Rule 936 has caused the giant pharmaceutical manufacturers and many other mainland corporations to continue to close their businesses on the island; 8) Puerto Rico has become a welfare state with only 40% of eligible workers seeking employment; 9) federal government assistance programs account for 21% of Puerto Rico's economy; and 10) debt service is now 20% of the budget and before long, even if interest rates remain at 9%, the debt service will increase to 30, 40 or even 50% of the budget.
There is no sign of relief. Officials in San Juan and Washington are adamant that a federal bailout is not on the table. The effort to raise taxes has run into political opposition and contributed to the faltering economy. The economy will continue to suffer with a mass exodus of young Puerto Ricans seeking employment on the mainland. Although Puerto Rico's Constitution offers bondholders strong guarantees that they would be paid before pensioners and public workers if the Government went broke, where will that money come from when the Commonwealth becomes a state of anarchy? The Commonwealth will simply not be able to refinance its debt as it has for the last 10 years, and if it does, the debt service expense will continue to spiral out of control.
Notwithstanding, some UBS Puerto Rico, Santander Securities and Popular Securities financial advisors are still telling their clients not to worry about their overly concentrated and overly leveraged Puerto Rico securities portfolios. When will these advisors stop lulling Puerto Rico investors into believing that this market is a buying opportunity and their portfolios' market value will rebound? In the securities litigation world, the broker-dealers are engaging in what is known as fraudulent concealment. The brokers are covering up their misdeeds to avoid lawsuits and arbitration claims. It's time for Puerto Rico's investors to fight back against the profiteers of this faulty debt market of many years.
The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. Please see our Instablog profile (left column) for ways to contact us and get answers to any of your questions about this blog post and/or any related matter.