This article, written by Townhall.com columnist Stephen Moore, provides a concise overview of the imminent Puerto Rican (PR) debt crisis and suggests a grand plan as a solution. Some Puerto Rico municipal bonds have lost 50 to 70 percent of their value, enticing vulture funds to purchase considerable amounts of the distressed debt. And according to a February 12 CNN Money article, hedge fund manager, John Paulson "sees big profits ahead. He has plowed quite a bit -- an estimated $1.5 billion -- of his personal wealth into buying hotels, a resort, and office buildings on the island."
Despite Puerto Rico municipal bonds' popularity with investors for their high yields, special tax benefits, and prior investment grade rating, I avoided investing clients' money in PR munis due to the island's weak demographics and troubling debt-to-GDP ratio. PR's economy is in a precarious condition and faces serious fiscal challenges. The bottom line is that PR is in need of an economic overhaul. As Stephen Moore eloquently states "Puerto Ricans are American citizens whose lives have been turned upside down. The U.S. government has a moral, if not legal, obligation to help. But as a territory Puerto Rico needs to agree to help itself." Let's hope Congress can pass a sensible bipartisan bill in the coming months that satisfies both bondholders and the Commonwealth of Puerto Rico.