It’s tempting to view the Greek debt crisis as a uniquely European folly, but sadly it’s not. It isn’t even the only current example of a debt crisis within a single currency area in the developed world.

The Caribbean island of Puerto Rico is a territory of the United States, its currency is the US dollar and its people are natural-born US citizens. Nowhere on Earth is more likely to become the 51st state. Unfortunately it’s also broke and earlier this month it defaulted on part of its debt obligations.

As Matt Phillips notes in a report for Quartz, the default was entirely predictable:

“Ratings agencies and bond markets have been screaming about the risks for, literally, years.”

A comparison with the state of New York puts Puerto Rico’s debt in context:

“Over time, Puerto Rico’s debt burden ballooned to ludicrous levels that should have dissuaded anyone with a modicum of sense from buying them. For example, by 2014, Puerto Rico had approximately as much debt outstanding—roughly $61 billion worth of rated bonds, by Moody’s count—as New York state. New York’s debt-to-state GDP ratio, a gauge of the ability to pay, was a slightly high 4.7% that year. Puerto Rico’s was a nonsensical 53.9%.”

You might have thought the lenders would have been dissuaded by the scary fundamentals – but, oh no:

“…who was buying these ridiculous securities? Rich people. Affluent individuals dominate the market for municipal bonds. And the US municipal bond market loved Puerto Rican bonds. Why? Because money, as the millennials like to say.

“The debts of Puerto Rico have been exempt from US federal, state, and local taxation since 1917. Normally, US municipal bond investors can only take advantage of municipal bond tax exemptions for bonds issued by the states in which they reside. So, for instance, a New York muni bond investor would have to buy New York state bonds. Puerto Rico’s triple-tax-exemption incentivized investors from all over the country to buy the commonwealth’s debt.”

As with Greece, the financiers saw a chance to make an easy buck and so ignored the long-term dangers.

For all the special insanity of the Eurozone, we should never underestimate the ability of the money markets to make the same mistakes over and over again. For instance, it didn’t take the Eurozone to persuade investors to put their money into those tempting Icelandic savings accounts, did it? All it took was a juicy interest rate – ditto Puerto Rico:

“Puerto Rican bonds have paid quite high yields in recent years, a reflection of the territory’s large debt burden and the risks it entails. The prospect of lower taxes and higher returns ensured healthy demand for Puerto Rican bonds…

“The result: Roughly half of all US open-end municipal bond funds own some form of Puerto Rican debt…”

How much more of this debt gets defaulted on is anyone’s guess; but at least the US authorities have an opportunity to learn from what the Eurozone authorities did in Greece to make a bad situation worse.

Let’s also hope that governments everywhere learn the lesson of financial history as a whole, which is that money markets can never be trusted.

Prudent regulation can help, but ultimately the only true defence is an iron determination that lenders should bear the full cost of their own recklessness.


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