Puerto Rico’s economic woes

As we mentioned this morning, Puerto Rican Governor Luis Fortuño is expected to announce massive public layoffs as part of his austerity plan for the island. The plan might also include several tax increases and the forced retirement of public workers with a minimum of thirty years on the job.

The plan is likely to meet with widespread opposition from numerous sectors but it might be necessary due to Puerto Rico’s frail economy. According to Government Development Bank President Carlos Garcia the island is going through its third consecutive year in recession with little hope for immediate recovery. Garcia added that the island’s credit rating has fallen to junk status and is close to the dreaded non-investment status.

The pitiful state of Puerto Rico’s economy can best be represented by the problems with its pension gamble gone wrong:

The government of Puerto Rico borrowed $2.9 billion through pension bonds in 2008, betting that it could reap annual returns of 8.5 percent investing the money, while paying its bondholders 6.5 percent.

“The risk is minimal,” says Jorge Irizarry, who was chairman of the Employees Retirement System of Puerto Rico from August 2007 through December 2008…

So far, Puerto Rico’s wager isn’t paying off. The 8.5 percent expected rate of return has instead been a loss of more than $200 million, according to a Dec. 12 presentation by fund administrators to legislators.

“It was an arbitrage transaction, and the market has turned against us,” says Carlos Garcia, former president of Banco Santander Puerto Rico, who replaced Irizarry as chairman of the pension fund in January. “I don’t know if the benefits intended will be realized.”

It remains to be seen if Fortuño’s strategy will work. With such a weak economy on the island it’s hard to imagine it getting worse and plunging Puerto Rico into a deeper quagmire.

Image- mental_floss
Online Sources- Bloomberg, Caribbean Net News, primerahora.com, El Reportero Las Vegas, The Latin Americanist,