Greece-ing the Skids: Is the Puerto Rico Debt Crisis as Bad as the Greek Crisis?

On Tuesday, Greece defaulted on a $1.8 billion payment due to the International Monetary Fund (IMF). even after months of partial bailouts and negotiations.  According to The Hill, Greece’s debt has reached $350 billion or 180 percent of its gross domestic product (GDP).  Closer to home, Puerto Rico recently announced that it cannot pay its $72 billion debt (70 percent of its GDP).  Both are plagued by financial mismanagement and economic misfortune.  However, a Greek default will have a severe and immediate impact on Europe’s financial system, posing a risk for catastrophic failure of the European Union itself.  The trillion dollar question is whether Puerto Rico’s debt crisis will have the same effect on the U.S. financial system.

Both economies are but small players within the monetary unions to which they belong.  Greece accounts for barely 2 percent of the E.U.’s GDP, while Puerto Rico accounts for just 0.6 percent of U.S. GDP.  Although similarities can be drawn to both crises, there are many differences that make Greece’s slope a bit more slippery.

First, Greece’s debt is in the official hands of the European Central Bank, while Puerto Rico’s is held by private investors attempting to take advantage of tax benefits.  This makes its debt more flexible for restructuring and increases the likelihood of a deal with creditors, absorbing most of the blow to the U.S. economy.  Greece’s default will adversely affect numerous countries across the E.U., which hold nearly 131 billion Euros of Greek debt.  Second, a Greek default and subsequent exit from the E.U. would set a dangerous precedent for its members.  Membership in the E.U. was once considered irrevocable, but the right to exit (or be kicked out) could become contagious as markets attack other highly indebted European countries such as Italy, Portugal and Spain, contributing to a break-up of the entire union.

Puerto Rico is a U.S. territory, not a state.  As such, a federal bailout is unlikely.  Puerto Rico has been given powers to issue bonds that are free from federal, state and local taxes.  This special tax status has allowed it to run up such a high debt that states are prohibited from doing.  It is also excluded from U.S. bankruptcy laws and cannot directly devalue its currency-the U.S. dollar.  Adding the fact that most of the $3.7 trillion U.S. municipal-bond market will be isolated from Puerto Rican-specific debt, the U.S. financial system is positioned far enough away to avoid any risk of severe impact resulting from this crisis.

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