Here’s a great, timely summary of the financial problems in Puerto Rico. It looks like things will get pretty messy before the US government steps in to bail-out the Puerto Rican government. And who will benefit from the bail-out? The holders of Puerto Rico’s bonds, of course.
Q. Who would be crazy enough to invest in Puerto Rican bonds?
A. “a high-income person living in a high-tax state”
I think the best term for describing this fiasco would be “the Puerto Rican Put”, anomalous to the Greenspan Put that led to the 2008 asset bubble in the U.S. Investors were assured that Greenspan would keep interest rates low so they could invest in bonds without worrying about rising interest rates. Another example would be the implicit (but not explicit) backing of FMHA bonds by the US government. When the security behind the bonds (ie home mortgages) tanked the government bailed out the bond holders (not the home owners). It’ll happen again in Puerto Rico.
“What’s this business about Puerto Rican bonds and taxes?All municipal bonds are exempt from federal income taxes. In additional, if you buy municipal bonds issued by the place where you live, those bonds are exempt from state and local income taxes as well. Such bonds are known as triple tax exempt, and they’re a big deal for municipal finance and high tax places like New York and California. But Puerto Rico’s bonds are triple tax exempt regardless of where you live.This is not a huge deal for most Americans, but for a high-income person living in a high-tax state it can be a very big deal and it helped fuel a lot of lending to Puerto Rico that wasn’t necessarily thought through in a very serious way.”