A Greece of Our Very Own

Puerto Rico’s governor did not mince words in an interview given to the New York Times last week but published yesterday: 

“The debt is not payable,” Mr. García Padilla said. “There is no other option. I would love to have an easier option. This is not politics, this is math.”

It is a startling admission from the governor of an island of 3.6 million people, which has piled on more municipal bond debt per capita than any American state. […]

He said creditors must now “share the sacrifices” that he has imposed on the island’s residents.

“If they don’t come to the table, it will be bad for them,” said Mr. García Padilla, who plans to speak about the fiscal crisis in a televised address to Puerto Rico residents on Monday evening. “What will happen is that our economy will get into a worse situation and we’ll have less money to pay them. They will be shooting themselves in the foot.”

The commonwealth currently has more than $72 billion in outstanding debt—roughly eight times the face value of Detroit’s. Unlike Detroit, however, Puerto Rico is not eligible for federal bankruptcy protection, and since it is not a country, it is also ineligible to seek outside funding from the IMF. And most importantly, unlike Greek debt, which is largely now owned by the IMF and European Central Bank, Puerto Rico’s municipal debt is scattered across “safe” portfolios of millions of American investors. Even if you’re not an active market participant, your pension fund is probably on the hook.

As if to underline the governor’s talking points, a new report was released on Sunday by the Puerto Rican government that had similarly bracing language: “Probably the most startling finding in this report will be that the true fiscal deficit is much larger than assumed,” the report said. “Even a major fiscal effort leaves residual financing gaps in coming years, which can be bridged by debt restructuring.” Brace yourselves, America. This could be a bumpy ride.