Puerto Rico Near Financial "Death Spiral"

In February, 2014, I blogged about Puerto Rico's impending fiscal disaster and its impact on the US municipal bond market. The financial earthquake from a likely Puerto Rican bond default appeared to be substantial. What changed between then and now? Until recently, nada.

In the past few days, Puerto Rico's rulers have thrown in the towel. According to a story in today's Washington Post (and elsewhere), the Commonwealth is $72 billion in the hole. Meanwhile, the debt meter is running without hope of repayment. Puerto Rico's governor has characterized the island's financial situation as entering a "death spiral." Ugh. Considering the majority of domestic mutual bond funds hold Puerto Rican paper, this scenario is a problem that could jar millions of American retail investors as well as institutional players.

The nearly certain Puerto Rican default, coupled with the Greek financial crisis, makes it a tough holiday week for high finance's Masters of the Universe. Predictably, Puerto Rico's governor has asked creditors to "share the sacrifices" the island's residents will soon be asked to endure. There has been no evidence to request has met any sympathetic ears.

$72 billion is a lot of money, even by today's tawdry standards. However, a little perspective might be helpful. In 2003 alone, the Department of Defense officially spent $54 billion on the second Persian Gulf war alone. Including operations in Afghanistan, the DoD raised the ante in 2004 to $70 billion. Those conflicts remain ongoing.

So does the Commonwealth of Puerto Rico's financial bleeding.