The financial press focuses on Greece, but there are interesting things happening also in Puerto Rico. On Sunday, Alejandro Garcia Padilla, the island’s Governor, said that the commonwealth couldn’t pay its debt worth roughly $72 billion. What does the Puerto Rican debt-crisis mean for the financial markets and the price of gold?

Although Puerto Rico managed yesterday to pay back its $1.3 billion debt, the remaining island’s debt worth more than $70 billion is not payable. In some sense, Puerto Rico is just like Greece. As joining to the Eurozone made Greek bonds more attractive to investors and led to over-borrowing, Puerto Rico experienced similar perks from its ties with the U.S. The island benefited from being a U.S. territory, because it started issuing bonds in the U.S. municipal market that were tax exempt and less risky. In consequence, the debt increased to an unsustainable level (which was ignored for years) and the island’s bonds rating was cut to junk status. Both Greece and Puerto Rico are parts of a currency union – the chronically uncompetitive parts with large public sector and high labor costs in the union with more productive members. As Greece, the U.S. commonwealth has lost the ability to fund through public debt markets and had to implement austerity measures, including pension cuts and hiking taxes.

There are, however, two important differences. First, Puerto Rico as a territory and not a municipality (or independent country like Greece) cannot declare bankruptcy under Chapter 9, like Detroit did. This is why its Governor is going to ask Congress to change the law allowing Puerto Rico to declare bankruptcy. Interestingly, the White House likes the idea and it declined any bailout for Puerto Rico, while it had earlier criticized the Greek government and urged it to make a deal with its creditors.

Second, although Greece owes much more debt, the direct impact of Puerto Rican default on the U.S. investors could be much bigger, since only around $14 billion of Greek debt is owed to U.S. banks, while all Puerto Rico’s debt is owed to U.S. investors.

To sum up, Puerto Rico managed to pay back its very recent payments, however, it could run out of cash in a few months. The direct impact of the possible Puerto Rican default would be more serious for the U.S. investors than a Greek default, but the real danger of the latter lies in the indirect consequences and eventual contagion effects (just think about Spain). The Puerto Rico’s case shows the Greece is not the only country or territory facing debt issues. Global indebtedness is not stable and the global debt is now more than twice the size of the entire global economy. Therefore, both crises could lead to butterfly effects and make black swans land somewhere in the financial markets, which should support the gold prices.

If you enjoyed the above analysis, we invite you to check out our other services. We focus on the fundamental analysis in our monthly Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals.

Thank you.

Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor

Gold News Monitor
Gold Trading Alerts
Gold Market Overview