A death spiral for Puerto Rico?

Standard & Poor’s downgraded the debt of Puerto Rico to junk status on Tuesday, intensifying a cash squeeze for the commonwealth, whose financial condition is of outsize importance to the rest of the United States because its debt is widely held by individual investors through mutual funds.

S.&P., which lowered its rating to BB+ from BBB-, said it had decided that Puerto Rico was no longer qualified as investment grade because its government was losing its ability to raise cash through the Government Development Bank. It said it did not expect the cash squeeze to ease soon and was keeping all of Puerto Rico’s debt on negative watch, which means more downgrades could follow.

The implications of slipping into junk territory are greater than a one-notch downgrade might suggest. A good portion of Puerto Rico’s debt was issued with promises to make cash payments if it fell below investment grade, and ready cash is precisely what Puerto Rico lacks. S.&P. estimated that the downgrade would initiate cash calls totaling $940 million, including the acceleration of debt service and the posting of additional collateral on interest-rate swaps.  Some of those commitments call for Puerto Rico to produce the cash within 30 days.

via S.&P. Lowers Puerto Rico Debt to Junk Status – NYTimes.com.

About mkevane

Economist at Santa Clara University and Director of Friends of African Village Libraries.
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