The U.S. has its own version of Greece in Puerto Rico, and the meltdown could be nearly as ugly when it arrives, according to a commentary in Friday’s Wall Street Journal. Puerto Rico Governor Alejandro Garcia Padilla last week admitted the open secret that the territory’s $72 billion debt “is not payable.” Europeans will notice the Greek-like reasons: excessive borrowing, anti-growth policies, human and capital flight, refusal of local politicians to address the failure of entitlement state politics, and the policy damage from Washington, D.C., according to the commentary. While not currently eligible for bankruptcy, the legislative proposals for granting Puerto Rico chapter 9 protection would be painful and carries risks, but an orderly restructuring under a legal framework in federal court is preferable to a creditor brawl that would likely follow a default, according to the commentary. Hedge funds, mutual funds and bond insurers would have to take haircuts for mis-pricing the risk and enabling Puerto Rico’s political mismanagement. Incredibly, yields on the island’s general obligation bonds were as low as 6 percent two years ago — below Illinois and Michigan GO bonds. They are now 12 percent.
