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…