The coming Puerto Rico banking bailout

NY Times:

...

The trouble this time is in Puerto Rico, the Caribbean commonwealth whose banks have been laid low by economic woes that make the mainland’s recession seem mild.

Now, Washington policy makers, who watch over the territory’s banks as they do its defense and foreign relations, are moving to broker mergers among several major lenders there to head off what could be a series of costly failures. Deals could come as early as Friday.

Few people probably realize that the Federal Deposit Insurance Corporation, which insures bank deposits in the 50 states, also insures billions of deposits in Puerto Rico. So if a bank in Puerto Rico goes under, customers are protected.

Rising unemployment, sinking real estate values and deteriorating government finances have worsened Puerto Rico’s chronically troubled economy and added new urgency to the efforts to shore up its banks. Loans are scarce, making life even harder for many local businesses.

Etienne Cardona, the owner of Café Hacienda San Pedro, a coffee shop in San Juan, has been trying for six months to get an $80,000 loan to open a second location.

“They ask for so many details that require a substantial investment before the loan is even approved that we decided to put off the project,” Mr. Cardona said. “For now, and until things get better, we’ll just stay here.”

A lending slowdown of this kind often causes a vicious circle — slower growth, more job losses and, in turn, an even sharper pullback in lending.

“This why it is so important for the banking system to get back on its feet,” said Troy Wright, president of the Puerto Rico Bankers Association and the head of Scotiabank’s operations there.

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One way backs got too big to fail in the US was the merger of smaller banks in trouble into larger ones. The Puerto Ricans appear to be in the too small to fail mode right now. They also appear to be in a credit seizure.

This is taking place at a time when some are pushing Puerto Rico statehood. While some on the Island still dream of independence, it looks like a dream postponed since they would then have no one to bail them out.

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