Puerto Rico Downgraded to Junk Bonds Status

by Christopher Freeburn | February 5, 2014 11:13 am

4. Bet Against Treasurys[1]Bonds issued by Puerto Rico have been downgraded to junk status by one credit-rating agency[2].

Standard & Poor’s slashed its rating for general obligation bonds from Puerto Rico on Tuesday. S&P cited rising Puerto Rico debt and the island’s “reduced capacity to access liquidity” in downgrading Puerto Rico bonds, the Washington Post notes.

Government officials in Puerto Rico said they were “disappointed” by the downgrade. In a bid to right its financial status, the government of Puerto Rico has raised taxes and cut public employee pensions. It plans to balance its budget by 2015. Despite the efforts, Puerto Rico has amassed about $70 billion in debt, raising questions about its ability to make its debt payments.

Puerto Rico bonds have become popular with many U.S. mutual funds because they are tax free and have paid increasing yields. If Puerto Rico is downgraded by Moody’s and Fitch, the island might have to take more radical steps to avoid a default on its debt payments.

The effect of S&P’s downgrade may become apparent when Puerto Rico tries to issue more debt in the next month or so.

  1. [Image]: https://investorplace.com/wp-content/uploads/2010/11/bond-vintage.jpg
  2. downgraded to junk status by one credit-rating agency: http://www.washingtonpost.com/business/economy/puerto-rico-bonds-downgraded-to-junk-levels/2014/02/04/c9495a22-8ddf-11e3-833c-33098f9e5267_story.html

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