San Juan By Way Of Athens

Greece isn't the only government this week who says it can't make its payments and wants a bailout, not by a long shot.  Much closer to home here in the states, Puerto Rico's governor says the island can't pay off the $72 billion it owes creditors.

The governor, Alejandro García Padilla, and senior members of his staff said in an interview last week that they would probably seek significant concessions from as many as all of the island’s creditors, which could include deferring some debt payments for as long as five years or extending the timetable for repayment.

“The debt is not payable,” Mr. García Padilla said. “There is no other option. I would love to have an easier option. This is not politics, this is math.”

It is a startling admission from the governor of an island of 3.6 million people, which has piled on more municipal bond debt per capita than any American state.

A broad restructuring by Puerto Rico sets the stage for an unprecedented test of the United States municipal bond market, which cities and states rely on to pay for their most basic needs, like road construction and public hospitals.

That market has already been shaken by municipal bankruptcies in Detroit; Stockton, Calif.; and elsewhere, which undercut assumptions that local governments in the United States would always pay back their debt.

Puerto Rico’s bonds have a face value roughly eight times that of Detroit’s bonds. Its call for debt relief on such a vast scale could raise borrowing costs for other local governments as investors become more wary of lending.

Perhaps more important, much of Puerto Rico’s debt is widely held by individual investors on the United States mainland, in mutual funds or other investment accounts, and they may not be aware of it.

Puerto Rico, as a commonwealth, does not have the option of bankruptcy. A default on its debts would most likely leave the island, its creditors and its residents in a legal and financial limbo that, like the debt crisis in Greece, could take years to sort out.

This is going to be a big political and financial problem going forward.  It's going to be up to Congress to figure out how and if they are going to help Puerto Rico, but I don't see how they can turn the island away without risking America's credit rating.

We'll see what happens, but this on top of Greece is going to be the next major financial mess for Washington to deal with.