Default of Puerto Rico is slowly affecting American investors

August 2, 2016

Many investors didn't even realize this with "Brexit" news though, Puerto Rico declared default on the 1st of July.

Default of Puerto Rico is slowly affecting American investors

This article is originally referred from iForex News

Puerto Rico, a small Caribbean island nation and one of unincorporated territories of the United States of America, declared default on July 1. Although many medias were rather covering Brexit news at that time, this is slowly affecting American investors.

$2 billion default in July

Puerto Rico is a small island nation in Caribbean Sea and one of unincorporated territories of the U.S. As an unincorporated territory, Puerto Rico is controlled by the U.S. federal government but not as much as 50 states are. For example, citizens of Puerto Rico do not have right to vote for US Congress.

The U.S. has some tax incentives on investing on Puerto Rican bonds. American companies and individuals do not have to pay either federal or state taxes if they made profit from Puerto Rican bonds. With these tax incentives, they say relatively many American hedge funds and individuals have invested on Puerto Rican bonds so far.

But the Puerto Rican economy is suffering from downturn recently. Puerto Rico used to grow by introducing foreign capitals to the region. But as this policy has been suspended recently, the Puerto Rican economy is not doing well any more.

Puerto Rican government agencies have declared default more than once since last year, 2015. One government financial institution declared default with $400 million in debt in August 2015, followed by another with $40 million in January 2016, and another with $400 million in May 2016.

There was another, but the largest in history of Puerto Rico, default on July 1, 2016, with $2 billion debt. After this default, the US Congress passed bailout bills for Puerto Rico. Even though there is no direct financial help, these bills help Puerto Rico to restructure its debts.

But these bills do not mean that institutional and individual investors who have invested on Puerto Rican bonds, will get all money back. Some individuals who have lost their money, will have to change their retirement plans.

What we really have to be concerned is “domino effect”. With Puerto Rico going default, some hedge funds who invested much money on Puerto Rican bonds, might go bankrupt with their bonds not redeemed fully. This is how a “financial crisis” could start.

Original Source: iForex News

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