Quiet crisis in Puerto Rico
Puerto Rico poses a ‘substantial threat’: Strategist/CNBC/6-30-2015
MK note: With the world’s attention on Greece, what is going on in little Puerto Rico has gone unnoticed. That is until yesterday’s announcement of Puerto Rico’s intention to declare a “moratorium” on its debt payments. Two bond insurers, Assured Guarantee and MBIA, had their stock prices hammered yesterday due to their exposure in Puerto Rico. Assured Guarantee shares were down 13% and MBIA shares down 23%.
“It’s a substantial threat,” bond expert Larry McDonald said Monday on CNBC’s Power Lunch. “The problem we’re seeing around the world is that political officials that are borrowing money in the capital markets have not been completely forthcoming about their financials.”
We recall the AIG collapse in 2008 – a centerpiece of the financial crisis. AIG was a major seller of credit-default swaps, a form of insurance against default on assets tied to corporate debt and mortgage securities. In the end, the federal government bailed out AIG to the tune of $85 billion. Yesterday’s reports had exposure at Assured Guarantee and MBIA at a mere $10.3 billion, but we are talking about their exposure in Puerto Rico only. If McDonald is right, this “quiet” and developing problem could go much deeper.
Puerto Rico’s total sovereign debt is $72 billion and, as declared by its governor, “unpayable.”