With rapidly rising debt and an unprecedented credit downgrade, Puerto Rico is facing a looming default with terrifying implications on American bond markets, though you would never know about it watching broadcast news.
The leading credit rating firm Standard & Poor’s Rating services downgraded Puerto Rican debt to “junk” status on Feb. 5, with further downgrades likely. Despite Puerto Rico having more than three times as much debt as Detroit did before bankruptcy, the broadcast networks paid no attention to this looming crisis in the six months before Feb. 1, 2014.
Puerto Rico, with $70 billion in debt and 14.7 percent unemployment, edges closer to a default. Regardless, ABC, CBS and NBC did not air a single story covering this crisis between Aug. 1, 2013 and Feb. 1, 2014.
At a whopping $70 billion, Puerto Rico’s debt is more than $5 billion more than its own gross domestic product and more than half that of the entire economy of Cuba, based on numbers from the CIA World Factbook. Meanwhile, the broadcast networks spent more time in those six months reporting on President Barack Obama’s new dog, Sunny, after her adoption in August. While spending no time on the Puerto Rican economy, ABC, CBS and NBC spent 11 minutes and 49 seconds on Sunny.
While the networks have not covered this growing crisis, many outlets from newspapers to financial publications did the opposite. Forbes, the New York Times, The Economist, the Wall Street Journal, and Business Insider have all covered Puerto Rico’s dire economic situation. USA Today called Puerto Rico “the latest poster child for serious debt woes,” while Forbes said that the island is “in the midst of a full-on bond market assault that now threatens the government’s ability to raise capital.”
Puerto Rico’s recent downgrade by S&P is a bad sign for Puerto Rican investors. As the Wall Street Journal reported, this decision will make Puerto Rican debt more expensive, deepening worries over their bond market.
Jeffrey Farrow, an expert on Puerto Rican issues who worked with President Clinton between 1994 and 2001, expressed his worries about further downgrades in an interview with the MRC’s Business and Media Institute. He claimed Moody’s Analytic and Fitch Ratings were likely to follow S&P.
Similarly, financial analysts have emphasized the specific importance of Puerto Rico’s bond market and the widespread impact of a default. Puerto Rican bonds are integral to the American bond market. Yields from these bonds are exempt from federal taxes, making them very appealing to investors. For this reason, The Economist said that “Puerto Rico carries outsized importance in America’s almost $4 trillion municipal-debt market.”
The White House is also troubled by the island’s deteriorating economy. In 2009, President Obama expanded the powers of the President’s Task Force on Puerto Rico’s Status, according to Martin Sullivan of Tax Analysts. In November 2013, the co-chair of that task force, David Agnew, announced that the administration would compile a team of experts to analyze the Puerto Rican economy and recommend appropriate federal assistance.
A Puerto Rican default could have widespread repercussions on other indebted American cities and states. Tom Tzitzouris of Forbes suggested that default would have “immediate implications for states like Illinois and California” but also “eventually the U.S. government itself.”
Puerto Rico’s rising debt and $37.3 billion in unfunded pensions are also threatening public employee retirements. Some Puerto Rican economists, such as Gustavo Velez advocate that the government must cut benefits because they “have to find a solution.”
The Puerto Rican economy is suffering from out of control debt, unfunded pensions, and rising unemployment. Puerto Rico’s debt has been estimated at $70 billion, which Forbes reports as amounting to $17,000 for each citizen. The territory also owes $37 billion in to public employee pensions. Furthermore, Puerto Rico has a mere 41% labor participation rate and a shocking 14.7% unemployment amongst the labor force. It is no wonder that the Economist called Puerto Rico “Puerto Pobre,” meaning “poor” in Spanish.
These problems stemmed from the same sort of liberal policies that wrecked Detroit. John Hayward of Human Events described the “decades of tax-and-spend liberalism” that resulted in Detroit’s demise. Moreover, the Detroit Free Press reported that Detroit “engaged in a billion-dollar borrowing binge, created new taxes and failed to cut expenses when they needed to.”
Similarly, Puerto Rico pursued aggressive deficit spending. Puerto Rican budget deficits have averaged “2.5% of GDP from 2009 to 2012,” according to The Economist. Deepak Lamba-Nieves, research director for a San Juan think tank, said “You cannot pay daily expenses with your credit card, and that’s what Puerto Rico has been doing for years.” He elaborated on the extent of deficit spending, saying “We borrowed just to keep the lights on.”
Jeffrey Farrow called Puerto Rico’s spending policies “unsustainable.” He told BMI that Puerto Rico had been borrowing money regularly just to pay government salaries. He said that “over the past 13 or 14 years, Puerto Rico has been doing that quite intensively.”
Puerto Rico also recently increased corporate taxes and broadened the sales tax, raising taxes by $1.3 billion in 2013. A prominent investment executive, Richard Larkin emphasized the dramatic nature of this tax hike, writing “To say that Puerto Rico’s tax increase for 2014 was monumental is an understatement.”
Puerto Rico, as a territory, cannot file for bankruptcy like Detroit. Therefore, a default would raise the possibility of a government bailout, potentially costing taxpayers billions. Governor Alejandro Garcia-Padilla denied that the island would default or need a bailout, despite unease among investors. The White House publicly announced on Jan. 22 that it was not considering a bailout.
Methodology: BMI reviewed every transcript for ABC, CBS and NBC’s morning and evening news shows between Aug. 1, 2013, and Feb. 1, 2014, looking for stories mentioning Puerto Rico. BMI also analyzed transcripts for the same shows between Aug. 1, 2013, and Feb. 1, 2014, for discussions of Obama’s dog, Sunny, before timing each segment.