U.S. territory Puerto Rico on verge of bankruptcy as home to the I.R.S. close to bond default

As the mainstream media continues to parrot the faux economic recovery, one important territory within the United States has been absent in the Fed’s artificial growth explosion.  And while Puerto Rico does not figure into the nation’s unemployment and GDP growth numbers, the island protectorate does contain one of the most lucrative government facilities, which of course is the I.R.S.

However, even the private corporation that was setup to backstop the Federal Reserve appears unable to aid in the inevitable default that awaits Puerto Rico, as a coming bond payment due by July 1st threatens to bankrupt the island and perhaps even trigger a cascade of derivatives that are tied to every security in the global economy.

Late last month we outlined what is an increasingly desperate fiscal crisis in Puerto Rico. The commonwealth faces a July 1 payment of $630 million on its GO bonds and without furloughing some public sector employees, it’s not clear that the payment can be made, setting up a possible default.

“They really aren’t going to have the cash. There’s no tax you can legislate today that will generate enough income by the time you need it,” Sergio Marxuach, public-policy director at the Center for a New Economy in San Juan, told Bloomberg earlier this month.

In total, Puerto Rico owes some $73 billion, the result of persistently covering deficits with debt even as economic activity continued to slow. On the heels of last month’s failed attempt to push through tax reform, lawmakers and Governor Alejandro Garcia Padilla are now scrambling to pass a new proposal that calls for a sales tax increase and $500 million in spending cuts as part of a 2016 budget which Puerto Rico desperately needs to pass by a July 1 deadline in order to resurrect a $2.9 billion oil-tax bond offering. The proceeds from the proposed deal would go towards repaying a loan from the Government Development Bank which may run out of money by the end of September if the new issue doesn’t materialize. – Zerohedge

Puerto Rico’s $73 billion debt is greater than all but two U.S. states, but is still below America’s overall debt to gdp ratio is 103%.  In fact, the island nation has a surprising annual GDP of around $103 billion, which is tied primarily to tourism and a manufacturing base that fuels much of the pharmaceutical industry.

But more than its sovereign debt obligations, any default by Puerto Rico on their bonds could have the potential to create a domino affect within the entire global financial system, just as a debt default by Greece, Spain, or Italy could trigger portions of the over one quadrillion dollars outstanding in the derivatives market.

greece and puerto rico

According to financier Bill Holter, the credit markets have experienced two frightening flash crashes in just the past two weeks, signaling that the bond markets are extremely ii-liquid and parallel to the environment that brought about the 2008 credit crash.  And since the Fed chose to lash all the banks together as a result of the bailouts from seven years ago, should one bank or sovereign nation commit to a default, than that ship will bring all the others down.

Kenneth Schortgen Jr is a writer for Secretsofthefed.comExaminer.com, Roguemoney.net, and To the Death Media, and hosts the popular web blog, The Daily Economist. Ken can also be heard Wednesday afternoons giving an weekly economic report on the Angel Clark radio show.

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