Do You Bet on Greece or Puerto Rico?

As I was thinking about this post, I was reminded of an old joke. And one that requires you to say it out loud.

The old joke was a multiple-choice question: “How do you pronounce the capital of Kentucky?…Is it (A) ‘Lou-uh-ville’ or (B)’Lewis-ville?'” The answer, of course, is (C) Frankfort.

Gotcha.

So betting on Greece or Puerto Rico isn’t really a thing. The answer to the above question: “Do you bet on (A) Greece or (B) Puerto Rico?” is best answered with (C) Neither.

First, some background on Greece (courtesy BBC) and Puerto Rico (courtesy CNN Money). After you’ve digested those – you might need a beverage afterwards (Ouzo and/or Rum if you’re so inclined) – let’s take a look at what this means for you.

Greece: Not Looking Good

It’s late June 2015 and the news overseas isn’t good. Greece is likely going to exit the Euro Zone, something that has been so widely expected it has its own portmanteau: “Grexit.” Sunday, June 29, it was announced that a “Bank Holiday” would take place for a few days. If it has to be capitalized and put in quotes, “Bank Holiday” is really code for “HOLY CRAP THE FINANCIAL SYSTEM HERE IS REALLY MESSED UP.” Greeks can only withdraw 60 Euros from ATMs.

Greece has a young, photogenic financier in charge of its government – but looks don’t pay the bills and they’ll have to wiggle their way around IMF deadlines and the like. These deadlines (one is June 30, another is July 20) are dates when large payments are due. Hundreds of billions of Euros.

Read as many tea leaves as you like, but this does not look good. Greece will leave the Euro, drachmas will return, they’ll be valued at next to nothing, and the Greek financial system will screech to a near-halt.

If Greece were a stock, you’d short it. Say, short it all the way to zero.

Puerto Rico: Not Looking Better

If there were a parallel to Greece in the USA, it’s Puerto Rico. Greece isn’t really European, and Puerto Rico isn’t really American. (I’m ducking as I write this: but certain rights that are afforded Americans from the 50 states just aren’t afforded to Puerto Rico.) A US Commonwealth (with a population of 3.6 Million and more debt per capita than any US State), Puerto Ricans use the US dollar, but they don’t have a vote in General Elections, and their Senators and Representatives just sorta hang out in Washington.

Puerto Rico’s economy is an absolute mess – it’s so bad that their (equally photogenic) Governor says they will default on $70B in debt. Using the words “death spiral,” Gov. Alejandro Garcia Padilla says the island is in serious trouble. They, too, need help…and their problem is that they cannot use Chapter 9 of the US Bankruptcy code – that’s the Chapter that cities like Detroit have used to restructure their debt.

Their lifeline will have to come from mutual funds and hedge funds that have bought up their debt; and these funds will likely pull a Warren Buffett and ask for lots in return.

You may recall that, during the financial crisis of 2008, Buffett had billions to play with, and was willing to bet on the recovery. He pocketed billions. Here’s more on how that worked.

Bonds that had been at junk status are going to be…well, what’s lower than “junk status?”

If Puerto Rico were a stock, you’d short it. This one, too: all the way to zero.

What’s next – for them and for you?

What’s…interesting here is that I recently received information on a unique program touting the benefits of…Investing in Puerto Rico!

Before you laugh, think about it – and think about what will likely happen in Greece, too.

With the economy in the tank, both places will more than likely do two things:

  1. Drop the business tax rate to encourage development and
  2. Do everything in their power to bring tourism to their locales.

While this reporter is skeptical about investing in either country, there will be opportunities for individuals who want a really cheap vacation, or who want to startup or expand their businesses.

In the short term, since a Grexit will take some time, travel for EU members to the islands will be deeply discounted. Anything to stimulate the economy, right?

Americans will benefit from the fact that they can get to Puerto Rico without a passport, the island uses the US dollar, and there are tax benefits for moving your business there.

Bottom line for you: watch both places carefully.

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