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As Puerto Rico Moves On, Another U.S. Territory Crisis Arises

  • Virgin Islands faces similar fiscal challenges as neighbor
  • U.S. board moving closer to restructuring Puerto Rico’s debt

Just as a federal control board moves to steady the ship in Puerto Rico, another U.S. territory appears in need of a lifeline, too.

The U.S. Virgin Islands is grappling with some of the same forces that pushed its closest American neighbor into a cascading series of defaults. The island’s bonds were cut to junk by S&P Global Ratings, which is mulling another downgrade over the growing fiscal distress in the region. Meanwhile, Puerto Rico is moving closer to restructuring its $70 billion debt after the U.S. board overseeing its finances issued a framework to pull the commonwealth out of crisis and resumed talks with creditors.

With interest rates edging higher, the Virgin Islands --- which has more debt per person than Puerto Rico -- is finding it more difficult to borrow. The territory shelved a $219 million bond issue last week amid a spike in yields triggered by the post-election selloff in credit markets. That prompted S&P to place its debt on a negative watch for up to 90 days, warning that the government may find it difficult to meet its debt obligations if it struggles to access credit markets.

The two Caribbean territories are facing similar fiscal issues: shrinking populations, cash-strapped pensions, histories of borrowing to paper over budget shortfalls and unemployment rates that are twice as high as in the U.S. mainland. While Virgin Islands opposed the federal rescue law that installed a seven-member control panel to fix Puerto Rico’s finances, it may serve as a road map for the territory if it hits a fiscal cliff, S&P analyst John Sugden said.

"Before they get to that point, you’d have to see some of the issues that Puerto Rico’s on, in terms of not paying the debt or getting closer to that,” Sugden said.