Thursday, July 21, 2011

The "D" Word

While listening to National Public Radio's Planet Money, which recently did a podcast titled "How Much Debt is Too Much?" and analyzed the debt to GDP ratio (the amount of money you owe divided by your annual income) of countries such as Greece, Italy and the U.S, I couldn't help but look up Puerto Rico's figure. As mentioned in the podcast, when a country takes on too much debt, it can stifle economic growth. This would subsequently make the country borrow even more money, and lead to a potentially dire future if no budget changes are implemented in the long run. Turns out that the island's debt to GDP ratio in 2010 was 56.7% (an estimated $14,289 worth of debt per resident in Puerto Rico). In comparison, California, for all its budget problems, the ratio is currently a little over 19% (or roughly $10,009 per resident in the Golden State). As for the U.S, the ratio is almost at 100%. Greece, which has of course made worldwide headlines for its huge economic woes, has a ratio of a whopping 150%.

Historically, according to Harvard economist Ken Rogoff, countries start running into trouble when the debt to GDP ratio goes above 90%. Puerto Rico is certainly not considered to be a Greek tragedy but, if it were a state, the island would have the worst per capita debt in the U.S. In an effort to reign in spending and decrease its debt (as well as improve its standing with credit rating agencies such as Moody's and Standard & Poor's) thousands of government workers have been laid off and certain governmental agencies have even ceased to exist, as they have merged with other departments. In the latest attempt to decrease government debt, and beef-up its coffers, Gov. Fortuño decided to cede the operations of one of the most heavily transited highways on the island to a Goldman Sachs-led consortium. This group had reportedly placed a $1.08 billion bid for this venture. The government is now also hoping to privatize the island's largest airport and is looking for takers. Puerto Rico also has a severly underfunded public pension system, which Moody says is worse than what most states in the U.S mainland are confronting.


Kofla Olivieri said...

I am surprised Fortuño has not offered to sell every piece of land to China, lol We are doomed.

Anonymous said...

Your post is all to kind to PR. The rest of the artical sums it up

" If we use Gross National Product (GNP), a more accurate measure of real economic activity in the island, the ratio jumps to 86.5%.

In per capita terms the picture is equally dismal. We estimate debt per capita in Puerto Rico to be approximately $14,289, while in Connecticut, which has the highest per capita indebtedness in the United States, it is $9,366. Furthermore, and perhaps more worrisome, the amount of debt per capita in Puerto Rico roughly equals 100% of the island’s per capita disposable income in 2010.

Puerto Rico’s combined tax supported debt and unfunded pension obligation is higher than Florida’s ($38.4 billion); New York’s ($50.8 billion); or Texas’ ($28 billion).

In our opinion, any objective analysis of the data leads only to one conclusion: no matter how you slice and dice it, Puerto Rico is essentially insolvent."

Once the American recovery act funds dry up PR will be in real trouble. Unless Fortuno can find a way to get more money from the feds. He seems brilliant in that respect. That 4% tax on companies was genius!