Home News As Puerto Rico Left Reeling from Hurricane Maria, Banks Left Scrambling for Cash

As Puerto Rico Left Reeling from Hurricane Maria, Banks Left Scrambling for Cash

by fffp12

Written By: Miles Pearson – Forex Focus

In Puerto Rico, the old adage “When it rains, it pours” has never been truer. Previously the US island territory suffered through a financial crisis that prompted it to finally declare bankruptcy in the face of its mounting financial debts. The bankruptcy declaration by Puerto Rican Governor Ricardo Rosselló was the culmination of an historic recession that had plagued the country for years, and defied many expectations as the country—constitutionally—is barred from declaring bankruptcy. Nonetheless, the island territory—not a country and not a state—declared bankruptcy in May 2017, prompting a flurry of debate and activity from American lawmakers and global speculators. Puerto Rico’s newest woes, however, are of a different stripe.

Hurricane Maria swept through Puerto Rico and left the country battered—with island-wide communication outages and power failures. Supplies of food, water and fuel have been quickly dwindling, while recovery efforts continue to work throughout the country. The storm’s destructive effects were just the first jab in a one-two combination that hampered Puerto Rico. Surprisingly, one of the other goods in short supply is the island’s cash.

With power failures sweeping through the island territory and road closures from infrastructure damage limiting mobility, electronic banking has been altogether suspended, reverting the island to a cash economy. The estimated turnaround time for the recovery of the island’s electrical grid is four months; a timeframe that, top bank officials say, will prompt ordinary Puerto Ricans to flee for the mainland. However, with recovery efforts at full-tilt, there are still major impediments to physically moving cash to the necessary ATMs (automated teller machines) and cash outposts. Chief among these are road closures caused by the physical damage of the storm. Trucks are incapable of passing through some of the physically damaged areas left by Hurricane Maria, and, in turn, sectors of the island continue to be isolated with limited supplies of cash. To make matters worse, officials advise that they have the trucks and cash necessary to ship to these locations, but simply do not have the necessary manpower to deliver cash to the various ATM locations. While this could be due to evacuees prior to the storm, or from manpower being siphoned toward the recovery efforts, it sounds as though Puerto Rico’s hobbling economy is on course for another setback.

This unfortunate combination of factors means that the economy will suffer as its debt restructuring takes a backseat to the recovery efforts from the recent hurricane. Moreover, with the cash economy already in a weakened state, and a delayed timetable for recovery of the island’s electrical grid, the economic recovery will likely decelerate economic resilience to the debt issues. As citizens flee for the mainland from the storm damage, output will likely fall and further decelerate the economic recovery.

Upon visiting Puerto Rico in the wake of the hurricane, US President Donald Trump announced that he planned to eliminate the island’s bond debt. The shock announcement by the US president sent chills through bond markets as the suggestion has widescale implications for bond debts. Eliminating Puerto Rico’s debts could raise interest rates on bonds to insulate against potential defaults, and subsequent debt elimination, on municipal bonds. Yet it is difficult to argue against the logic. Puerto Rico is bankrupt, and its debts are unserviceable. If the debt can’t be paid by the island, it simply won’t be, and Puerto Rico will undergo much of the same bond-market isolation that plagued Argentina until recently. This result is only calcified by the suggestion that if conditions in Puerto Rico continue slipping, citizens will simply leave for the US mainland.

While Puerto Rico’s debt-holders may be reluctant to accept a write-down of the territory’s financial obligations, there may simply be no alternative. With conditions in Puerto Rico set to decline in the near future, and Herculean efforts required to return the country to growth, it may be some time before Puerto Rico can re-open the possibility of paying any debts, let alone its current debts. The bankruptcy declaration already defied expectations by going against constitutional law. The ongoing debates about Puerto Rican statehood suggest that the island may execute another legislative pirouette and change the face of its future.

 

Photo Attribution: Copyright: NASA.image

 

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