I have written a number of times about my interest in “America’s ignored backyard,” by which I mean the Caribbean region (including the US Virgin Islands) and the US Pacific territories, As I previously discussed, the Caribbean, as well as the US Pacific territories excepting Guam, has been mired in a debt and economic crisis since 2008. Most of these countries are small islands, with limited physical territory and small populations, which has lead them to have fragile economies.
Because of this, most of them are heavily reliant on the tourism industry to bring money into their countries, and tourism has never fully recovered since the global economic crisis of 2008. Additionally, the US territories have suffered the additional problem of about a decade and a half of horrible mismanagement from Washington, with the federal government passing various labor and tax laws which have destroyed the productive industries of these countries and left them totally reliant on borrowing and the struggling tourism industry.
The US Virgin Islands is a great example of these problems. In my old background post describing the history of the territory, I explained how the US government passed tax laws that discouraged investment in the country and caused the government to lose 20% of its revenues in 2004, how the territory lost their key employer, the oil refinery HOVENSA, in 2011, and the impact of the 2008 economic crisis. As of the time of that post, the future looked grim for the US Virgin Islands, with their economy having shrunk by 25% since 2007 and a massive unemployment and crime problem.
Unfortunately, since I wrote that post, the situation in the US Virgin Islands has only gotten worse:
Of course, exactly how long the USVI may take to default is impossible to tell. And that’s not because the islands’ financial problems aren’t glaringly obvious, or even because of a lack of transparency. It’s because Puerto Rico could still be merrily chugging along if investors hadn’t lost confidence and finally stopped lending to the troubled territory, forcing it finally address its gaping structural deficit. When lenders will stop forking over money to the USVI is a question for behavioral economists, but in the islands’ case, it’s likely to happen sooner rather than later, if it hasn’t happened already.
That’s in part because USVI investors already have Puerto Rico as a blueprint for what happens when things go horribly, horribly wrong. Just because the law says that bonds must be paid before all else, doesn’t mean that police stations will be shut down and teachers are fired while lenders are kept whole.
Worse, on virtually every measure. Yields are higher than Puerto Rico bonds were at the time, and even then the USVI hasn’t yet been able to enter the market, bond ratings are already junk rather than “barely investment grade.” Per capita debt is more than a third higher, the economy has contracted by significantly more, and both are borrowing to fill long-time massive budget gaps. While the USVI’s overall tax-supported debt at $2 billion is much lower than Puerto Rico’s $53 billion in tax-supported debt, per capita debt is about a third higher: $19,000 in the USVI compared with $12,000 for Puerto Rico.
Without question, the USVI is farther down the path of financial crisis than Puerto Rico was in August 2013.
The country has been hammered by the big three ratings’ agencies downgrading the country’s debt to junk status:
S&P Global Ratings has lowered its rating on the Virgin Islands Public Finance Authority’s (VIPFA) senior-lien matching fund notes to ‘B’ from ‘BB’ and its rating on subordinate-lien matching fund notes, issued for the U.S. Virgin Islands, by two notches to ‘B’ from ‘BB-‘, the ratings firm has announced via press release.
The outlook is negative.
The downgrades follow those of ratings firms Fitch and Moody’s, whose actions have weakened the Virgin Islands Government’s already weak standing with bondholders. The government, through the Public Finance Authority, issued an updated version of the press release that it issued on Wednesday, basically stating the same thing: “The report by the rating agency Standard and Poor’s pointed out important issues concerning the U.S. Virgin Islands debt and financial conditions. That is why the governor had ordered that a five-year plan be developed with the goal of reducing the government’s deficit and developing a roadmap to fiscal stability. We believe the five-year plan is a blueprint to deal with reducing government structural deficits and provide fiscal balance and economic growth.”
A March 9 article warns that the government may not even be able to pay its employees much longer:
Government House Communications Director Cherie Munchez told The Consortium on Tuesday that she could not say for sure whether government employees would be paid next week, another indication of the territory’s deep financial trouble, which is compounded on many levels — from a structural deficit of over $100 million, to a failing pension system, whose unfunded liability is nearing $4 billion.
On government payroll, Ms. Munchez said, “This obviously is an issue that we work on a regular and daily basis, so we’ll stay there with that.”
Ms. Munchez said the government was seeking funding through a short-term revenue anticipation note (RAN) transaction against real estate property taxes, while it attempts to reposition itself for the bond market — which has refused to lend money to the territory’s government citing a lack of confidence in the G.V.I.’s continued ability to meet its obligations, and a structural deficit that keeps it revisiting the market annually.
But whether the government will be successful in security the RAN, remains to be seen. “It’s still being worked on,” Ms. Munchez said.
Government ineptitude and corruption has now lead a second US territory to the brink of financial collapse. The islands desperately need sane financial management and an unwinding of unpayable debts as soon as possible, as well as a return of their tax breaks to attract investment.
It benefits no one to have the US territories collapse into economic ruin, because that forces us into a situation where we then either have to unwind their debt and bail them out, or cut them loose entirely. Unfortunately, given the corruption of Puerto Rico’s default process, I think it is very unlikely we will do any better at working out a solution with the US Virgin Islands.
We can’t expect much reasonable action from a US political establishment that is monofocused on the ongoing Washington political drama and cares little for the national interest, especially when it comes to far-flung territories that hardly anyone on the mainland even knows about. The mishandling of the situation in the territories makes me wonder how bad things will get when the bills for municipal and state debt come due.