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Is Puerto Rico the Greece of the Caribbean?

Nicole Goodkind
Daily Ticker

European nations struggling to repay loans and requesting bailouts have become fairly common in the past few years, but now it appears that this trend might be crossing the Atlantic. Global markets and U.S. officials are becoming increasingly concerned that Puerto Rico will have to default on its debt.

Puerto Rico is currently crawling out of a five-year recession. The unemployment rate is in the mid-teens, government pensions are only 6% funded and GDP growth is moving at a snail's pace.

"There are aspects of Puerto Rico that are quite similar to [Greece]," says Robert Donahue, managing director at Municipal Market Advisors. He explains that the similarities include "high government employment, the [unregulated] tax system, the pension system, and the weak economy."

So is Puerto Rico the Greece of the Caribbean?

"We hope not," Donahue tells The Daily Ticker. Still, he's warning potential investors that Puerto Rico is a systemic risk.

Pensions for government workers could run dry as soon as 2014, and the once lucrative Puerto Rican pharmaceutical industry left the commonwealth when tax incentives expired.

Taxes are a serious issue for the island nation where many businesses don't report income to the government and there is no auditing agency to make sure that they do. The government has instituted a lottery for those who pay the island's 7% sales tax, but the initiative has so far been unsuccessful.

Unemployment has been in the mid-teens for the past six years, and many Puerto Ricans are desperate for work. This is part of the reason why Alejandro Garcia Padilla was elected president in the country's recent election -- he promised to create 50,000 jobs in the next 18 months.

Padilla is not in favor of austerity measures and his party seems to have little interest in resolving the nation's pension problems. This signals more trouble for the already distressed nation.

Puerto Rican municipal bonds have appeared to be a lucrative investment for many U.S. citizens; they yield high interest rates and are tax-free for investors in all 50 states. But is Puerto Rico a safe investment?

"We see Puerto Rico as the weakest of all states by far," says Donahue. "Debt as a percentage of GDP dwarfs any other state. Do we think they're going to default? Certainly not. What we want is to raise the attention of investors in America that there are risks in Puerto Rico and that the path they're on is unsustainable."

There has also been increasing chatter about Puerto Rico becoming America's 51st state. Early in November, 61% of Puerto Ricans voted for U.S. statehood. President Obama has said that he supports whatever the Puerto Rican people decide in regards to statehood.

Will Puerto Rico become America's 51st state? Don't count on it, says Donahue.

"We believe that this was a political maneuver to turn out voters on Election Day," he explains.

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