Boomergeddon Watch: U.S. Virgin Islands

Trouble in paradise…

The borrowing window has slammed shut on the U.S. Virgin Islands, reports Reuters. With about 100,000 inhabitants, the U.S. protectorate, acquired from Denmark during World War I, owes more than $2 billion to bondholders and creditors — the biggest per capita debt load, about $19,000, for every man woman and child, in the country. And that figure doesn’t include the islands’ woefully underfunded pension and healthcare obligations. Reports Reuters:

How these islands will recover from years of budget deficits and a severe liquidity crisis remains to be seen. The territory lost its single-largest private employer five years ago when a refinery shut down. Gross domestic product has declined by almost one-third since 2008. At times this year the government was operating with just two days’ cash on hand.

Locals live with pitted roads, crumbling schools, electricity outages and deteriorating medical care.

At the Juan F. Luis Hospital and Medical Center, plumbing troubles are just the beginning. Doctors have stopped performing some vital procedures, including implanting pacemakers and heart defibrillators, because the facility can’t pay suppliers for the devices, officials say.

The Virgin Islands are entering a vicious downward cycle. Unable to borrow, it cuts government services. As quality of life declines, people leave. As the population stagnates (or shrinks) the debt burden for those who remain gets even worse.

Here’s why what happens in the Virgins don’t stay in the Virgins:

Bond buyers for years whistled past the territories’ shaky finances, comforted in the knowledge that these governments couldn’t seek bankruptcy protections available to many municipalities.

“There was an idea that because of the lockbox structure and the fact that the territories did not have a path to bankruptcy, they had to pay you,” said Curtis Erickson, San Francisco-based managing director of Preston Hollow Capital, a municipal specialty finance company.

That all changed in 2016 when Congress passed legislation known as PROMESA giving Puerto Rico its first access to debt restructuring. The move sparked a ferocious battle among creditors to see who would shoulder the largest losses.

If bond holders end up taking a haircut for their holdings in Puerto Rico and Virgin Island bonds, they may start re-appraising their exposure to debt of, say, Chicago, Illinois and other deeply indebted U.S. municipalities and states. They may demand higher risk premiums for investing in municipal debt, which will impact governments with low bond ratings most of all, increasing their borrowing costs and making their debt burden all the more burdensome.

The dominos are falling…

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4 responses to “Boomergeddon Watch: U.S. Virgin Islands

  1. meh – 1/5 the size of Detroit.. half the size of Richmond… close to the size of Lynchburg… Puerto Rico, Virgin Islands, Samoa … and a few assorted others are protectorates (or variation) of the US…. and last time I check.. we weren’t going to set them “free”!

    But again – this goes back to the current discussion about what does Virginia do about the parts that are no longer economically healthy – and ergo what do other states do with their similar … i.e. what does the US do with states and protectorates that are an economic “drag” ?

    To this point – who knows where the politics are going… neither the US nor the States cut their economically distressed regions loose…

    Not without consequences for the taxpayers who do indeed pick up the costs but the option of cutting them loose ..another way of saying “abandon”.. or.. for those that don’t like that description – pick one you do like… at any rate.. we’re not doing the “walk away” thing…

    So what might be done instead? Any constructive ideas?

    • I don’t know what can be done about the Virgin Islands. I don’t know the islands well enough to say anything intelligent. I made this post more as a cautionary tale. The Virgin Islands and Puerto Rico are the canaries in the coal mine — warning signs of bad things to come.

      • Bad Hurricane Hugo damage in the 1990’s was major setback…more recent years the Hess refinery (industry) closed down, I presume that was not too helpful.

  2. interesting stat:

    GDP – per capita (PPP):
    $36,100 (2013 est.)
    $39,300 (2012 est.)
    $40,500 (2011 est.)

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