Puerto Rico's Borrowing Binge Could Rock the Muni-Bond Market

Seven years ago, in the wake of a government shutdown caused by a $740 million budget deficit, Puerto Rican officials vowed to fix the island’s finances by 2010. Instead, they went on a borrowing binge that’s brought Puerto Rico and its agencies’ debt to $70 billion. That’s double what it was in 2004, even though the commonwealth’s economic output has fallen 16 percent since then. Investor concerns about the island’s ability to pay its debts have driven Puerto Rican bonds to record lows, with a loss of 15 percent this year as of Oct. 29, according to Standard & Poor’s. “We’ve lost credibility in the market,” says Sergio Marxuach, director for policy development at the Center for a New Economy, a nonpartisan research institute in San Juan. “We used all that money to finance current expenditures, to refinance debt that had little or no impact on the real economy.”