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PR debt: With few options left, 'People are going to leave'

With Puerto Rico's dire financial and economic situation becoming more acute almost by the day, the commonwealth's population, creditors and government each face a new and serious set of problems. (Tweet This)

"People with options are going to leave Puerto Rico," said José Joaquín Villamil, chairman and CEO of Estudios Técnicos, a business and economic consulting firm based in San Juan.

Puerto Rico's population has been steadily declining since 2004, according to a New York Federal Reserve report. "Over the last decade, the number of residents has dropped to 3.6 million, a loss of more than 5 percent of the Island's population," the report said, adding that the decline is due in large part to an out-migration of Puerto Rican citizens to the mainland.

"The Jones Act of 1917 granted U.S. citizenship to the people of Puerto Rico, allowing them to move freely between the island and the U.S. mainland. This mobility has led more Puerto Rican workers to leave the island in greater numbers when economic opportunities have dwindled," the bank said.

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The island's Planning Board also estimates the overall population declining further, to about 3.35 million by 2020.

Villamil made his remarks after the commonwealth's governor, Alejandro García Padilla, told The New York Times last week that its $73 billion debt "is not payable," leading shares of bond issuers to tumble.

MBIA, one of the largest municipal bond issuers, saw its stock plummet about 20 percent on heavy volume in Monday trading.

Asked by CNBC for comment, a spokesperson for MBIA's National Public Finance Guarantee subsidiary, which guarantees state and municipal debts, said that firm "will continue to work with the appropriate parties toward a solution that addresses Puerto Rico's significant fiscal and operational difficulties while respecting the rights of creditors. In the meantime, National will ensure that its policyholders will continue to receive all of their scheduled interest and principal payments on time and in full."

BTIG Analyst Mark Palmer said the company has $4.54 billion of gross insured exposure to Puerto Rico's debt, according to The Associated Press, adding that the uncertainty surrounding Puerto Rico makes bond insurer stocks "unbuyable until clarity around the situation develops and the magnitude of the losses the insurers stand to realize becomes more apparent."

Puerto Rico Gov. Alejandro Garcia Padilla delivers his state of the Commonwealth address at the Capitol building in San Juan on April 30, 2015.
Puerto Rico Gov. Alejandro Garcia Padilla delivers his state of the Commonwealth address at the Capitol building in San Juan on April 30, 2015.

García Padilla's remarks came as a report authored in part by Anne Krueger, the former chief economist at the World Bank, illustrated the island's profound economic problems.

"Puerto Rico faces hard times. Structural problems, economic shocks and weak public finances have yielded a decade of stagnation, out-migration and debt. Financial markets once looked past these realities but have since cut off the Commonwealth from normal market access," according to the report.

The governor also told The Times that the commonwealth would seek to work with its creditors to defer some of its payments for as long as five years. "There is no other option. I would love to have an easier option. This is not politics; this is math."

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Puerto Rico's bonds are popular with U.S. mutual funds because they are tax-free, but hedge funds and distressed-debt buyers began stepping in to buy up debt as the island's economy worsened and its credit rating dropped.

Puerto Rico's situation has led many to recommend restructuring of its debt. However, its political status as a commonwealth does not permit it to file for bankruptcy under Chapter 9—as is allowed in the states.

HR 870, a U.S. congressional bill that would let the island's municipalities and public corporations declare bankruptcy under Chapter 9, was introduced last February and remains in the House's Judiciary Committee. But it's unlikely to pass, Frank Shafroth, a professor specializing in municipal bankruptcy at George Mason University, said at a conference on June 15.

"The perception is that, if you give Puerto Rico the authority to file for bankruptcy, that's the equivalent of a federal bailout, and that taxpayers in Iowa, in Texas and Alaska are authorizing federal funds to be spent to bail out Puerto Rico," Shafroth said.

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Krueger's report also laid out a series of recommendations to help Puerto Rico's government out of its fiscal hole, including obtaining debt relief through a "a voluntary exchange of old bonds for new ones with a later/lower debt service profile."

Nevertheless, the report noted that "negotiations with creditors will doubtlessly be challenging: there is no U.S. precedent for anything of this scale and scope."

Villamil of Estudios Técnicos dismissed the report's suggestions, however, saying they do not address how the commonwealth would jump-start its lack of economic growth.