Deficit spending and untenable pension obligations frequently go together, and always cause problems when they do.

Coupled with a buildup of debt, and a very bloated public sector (which also go hand-in-hand) Puerto Rico is about to fall to junk level.

Please consider Moody’s puts Puerto Rico on review for downgrade.

Citing Puerto Rico’s weak finances and economy, Moody’s Investors Service put the commonwealth’s general obligation rating of Baa3, the company’s lowest investment grade rating, on review for downgrade on Wednesday.

Moody’s also placed ratings capped by or linked to Puerto Rico’s general obligation rating on review, including the Puerto Rico Sales Tax Financing Corporation’s senior and junior lien bonds.

The moves affect approximately $52 billion of rated debt, the rating agency said in a statement.

Moody’s said it is concerned about Puerto Rico’s “weakening liquidity, increasing reliance on external short-term debt, and constrained market access, within the context of a weakened and now sluggish economy.”

“These developments exacerbate the longstanding financial strain brought by the commonwealth’s very high debt load and pension obligations, as well as its chronic budget deficits,” Moody’s said.

A major issuer of municipal bonds, Puerto Rico has been in or near recession for eight years. It has suffered from a loss of U.S. federal government economic support, spending cuts by its own government, high oil prices and population decline.

Exodus Underway

The Washington Post reports Puerto Rico confronts a rising economic misery.

Boxes and wooden crates filled with household items bound for the U.S. mainland are stacked high in the Rosa del Monte moving company’s cavernous warehouse, evidence of the historic rush of people abandoning this beautiful island.

Puerto Rico lost 54,000 residents — 1.5 percent of its population — between 2010 and 2012 alone. Since recession struck in 2006, the population has shrunk by more than 138,000 to 3.7 million, with the vast majority of the outflow headed to the mainland.

And while government workers make up about a quarter of the commonwealth’s workforce — much higher than the U.S. average of 16 percent — their ranks are shrinking as the pervasive debt and economic problems careen toward a reckoning. Now, just over 41 percent of working-age Puerto Ricans are in a job or even looking for one.

As work has disappeared, more Puerto Ricans have relied on the government to survive: About a third of the commonwealth’s population relies on food stamps, and residents of the island are twice as likely as those on the mainland to receive Social Security disability benefits, according to researchers.

Puerto Rico Unemployment Rate

Expect Default

On December 1, in Puerto Rico the Next Detroit? I said …

Puerto Rico has been in recession for 8 years. The unemployment rate is 15% and debt has piled up to the tune of $70 billion. How did Puerto Rico get into trouble? The short answer is the same way as Detroit: loss of industry coupled with lavish pensions.

Job flight, high crime rates, and huge pension woes in Puerto Rico seem similar to the problems in Detroit. However, there is no constitutional provision that allows US states and Commonwealths to declare bankruptcy.

Compounding the problem, Puerto Rico passed a massive set of tax hikes including corporate taxes, a broadened sales tax and a new gross receipts levy, hoping to get its budget under control. Given that tax hikes in the middle of a recession are about the worst possible choice, the situation is ominous.

So how is Puerto Rico’s debt going to be paid back? The answer is it won’t. Although, bankruptcy is out of the question, nothing can stop a default except a bailout by the US. Given that handouts from this Republican Congress are unlikely, look for Puerto Rico to default.

Puerto Rico is Toast

Of $70 billion in debt, $52 billion is subject to a downgrade to junk status. The rest may not even be rated.

A close friend with ties to the region writes …

Those leaving are predominantly from the upper end of society, as they see opportunity melting away and fear a dead end for their children. Upper middle class Puerto Ricans are educated, speak English, and are absolutely free to move to the US and find jobs. As you noted, the upper 40% pay 106% of the taxes. So the exodus is obliterating the tax base. The feds don’t want a run out of Puerto Rico.

But ultimately, the feds will have to step in, Republican Congress or not. The same policy that makes it completely easy for Puerto Ricans to move to the US means that if a panicked “run out of Puerto Rico” starts, it will be a smoking ruin. That would be extremely harmful to US foreign policy.

Mike “Mish” Shedlock