On Monday, the government of Puerto Rico missed a $58 million bond payment. What does it imply for the financial markets and the price of gold?

This week, Puerto Rico went into default for the first time in its history. The island paid a mere $628,000 toward a $58-million payment owed to the Public Finance Corporation. As a result, the credit rating agency Moody’s said that Puerto Rico had defaulted on its debts. The default was not a surprise, since investors had been bracing for a possible default at least since the end of June, when Governor Alejandro Garcia Padilla stated that the $72 billion in public debt could not be paid back.

What does this default mean for the financial markets? Well, not too much, because the debt is mostly owned by the island’s residents through credit unions, not Wall Street (however it could hurt prices for other Puerto Rico’s bonds). This is the very reason why the government chose not to pay the PFC debt, although it made other debt payments of $483 million. Contrary to hedge funds, ordinary Puerto Ricans have little legal power to fight back in court (and these bonds are not the general obligation bonds, but moral obligation bonds, which give investors less protection).

Thus, it is probable that the island intentionally skipped the payment to get Washington’s attention. The real problems, however, may start next year. On January 1, Puerto Rico has to pay $370 million on the general obligation bonds. Defaulting on them would be much more important for the markets, however, ownership of Puerto Rico’s debt is rather widely dispersed and only a few mutual funds are heavily concentrated in its bonds (at least they were concentrated in June), so the risk of contagion is limited. Additionally, Puerto Rico’s outstanding debt worth $72 billion is a tiny slice of the overall $4 trillion municipal bond market, and about 42 percent of it owned by residents of Puerto Rico.

The take-home message is that Puerto Rico defaulted for the first time in its history. Because its public debt is unsustainable and the territory cannot declare bankruptcy, the island’s debt crisis will be returning to the spotlight from time to time. However, it seems that its impact on the financial markets and the price of gold will be subdued (at least for some time, until larger payments will have to be paid off), since the risk of contagion is limited.

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Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor

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