In continuation of our ongoing coverage of the Puerto Rico economic depression, oh you haven't heard? Yes, local economists have officially declared that Puerto Rico's economy is in depression. According to Wikipedia, a depression is a drop in gross domestic product of 10 percent or more before a recession would be referred to as a depression. It can also be defined as a recession lasting 3 or more years. So in both respects, we are guilty.
In day to day terms, a depression is characterized by abnormal increases in unemployment, restriction of credit, shrinking output and investment, numerous bankruptcies, reduced amounts of trade and commerce, as well as highly volatile relative currency value fluctuations, mostly devaluations. and a population that is forced to dispose of tangible assets to fund every day living.
But I digress from our story. So when we left our heroes they were confident in their ability to convince investment bankers that Puerto Rico's economy was on the way to recovery. Let's catch up with our heroes, "Yes over here. we're reporting from Dondequiera, thanks. What did investment bankers say to your pitch?"
"They called our bluff. We thought our dog and pony show was going to be enough to stay out of trouble. But the called us out, and then it got ugly. Essentially, they said that we were full of shit."
"Ow, that's got to hurt! Did they say what would be enough to stay out of trouble?"
"Yes, they did. They said we needed to provide concrete actions on the part of the Puerto Rican Government to:
- reduce costs (government's budget);
- or, increase revenues (taxes)."
"They said if they didn't see what they were looking for by June 30th, then they would be forced to downgrade the credit rating for Puerto Rico."*
* We'll see this date pop back up real soon in this series, and then you'll realize it's importance"
Ok, so the investment bankers called the government's bluff. Now what? Ok, well if you might remember, the investment bankers lowered Puerto Rico's credit rating a few years ago. Our current credit status is one step above what is called junk bond status.
A quick little financce lesson, whenever a company, state, or country wants to raise some money that they are NOT receiving from their revenue strem (in our case taxes), well the country sells bonds. A bond is a financial instrument which is a guarantee between the issuer of the bond and the purchaser of the bond. That promise is, hey give me some dough, and I'll pay it back to you at some pre-established time in the future with some intrest thrown in to sweeten the deal. From the purchasers perspective, a bond is an investment. Think about bonds like a savings account or a certificate of deposit (CD). Currently Puerto Rico has some $55,000 million dollars of bonds or debt if you prefer.
What the hell does all of this have to do with me?
So, in short, in my humble untrained economist opinion (IMHUEO), the credit rating of Puerto Rico's bonds is THE most critical factor for our economy. If the Puerto Rican government is unable to satisfy the investment bankers and they downgrade our bonds, well bring out Jennifer Gonzalez, because this here game is over.
Two things can happen, or maybe both:
- Any existing bonds which have clauses (insurance), that as the credit rating goes down the Puerto Rican government will have to pay higher interest rates. These clauses may also state that we have to pay the debt back earlier than specified. So not only will our debt be called in early, but we'll have to pay more than the $55 billion big ones we already owe.
- Puerto Rico will have difficulty selling any future bonds, because our credit rating is so low. Since the bonds will be of little interest, the only way Puerto Rico can raise money is to offer higher interest rates until they are attractive to high risk investors. Since the rate of return is so high, they are willing to take the risk.
If this scenario should happen all sorts of wailing and gnashing of teeth will begin. According to investment bankers, without doubt, the consequences of meeting their expectation will not be as serious as the consequences of having our credit lowered.
How bad are we talking about? According to Carlos Garcia, President of the BFG, if our credit rating takes a hit you can expect unempoyment to double. And good old Milhouse said that he would have to fire around 110,000** employees from the government ranks if our credit gets bitch slapped. Not only that, the government retirement fund would lose 50% of it's value. Yeah, holy shit indeed.
** Hmm, that sounds familiar, now where did I hear a similar number before?