<i>Phil Fischer, head of municipal bond research at Bank of America Merrill Lynch:</i>
Puerto Rico's fiscal challenges stem, in large measure, from the sunset of section 936 of the federal tax code in 2006. Section 936 allowed profits earned by U.S. corporations in Puerto Rico to be federally tax-exempt. For 20 years between 1986 and 2006, as the value of 936 subsidies increased, the Government Development Bank's Economic Activity Index (EAI) grew roughly 60%. In the nine years since, however, the EAI has fallen roughly 19%. It took a long time for growth to take hold, and it stands to reason that Puerto Rico's economic devolution will take time as well. The end of 936 -- coupled with growing poverty levels and accelerating out-migration - lead to the unfortunate conclusion that this is a continuing process with a horizon in years, not weeks. The short-term looks troubling for Puerto Rico, given the government's recent statement that it will not have the resources to meet all of its obligations in fiscal 2016, and that a possible debt moratorium or claw back of otherwise legally pledged revenues could be in the cards. In terms of PREPA, there is no clear short-term solution. The market generally expects the authority to default or enter into a distressed exchange on or before 1 July. The bond trustee has already warned that it only has $236 million in its reserve fund, an amount insufficient to meet debt service obligations due on July 1. It is important to emphasize that Puerto Rico as a political entity and geographic presence will outlive its financial difficulties. To be sure, Puerto Rican officials value access to the capital markets, and over time, will reestablish it. For the commonwealth long-term, it is necessary to fix the economy and stem the outflow of its citizens. Also, it is now well demonstrated that the commonwealth's status as a territory is a significant contributing factor to its current challenges, and in that respect, a clarification is important for long-term stability. PREPA, meanwhile, badly needs to modernize its plants to remain compliant with federal regulations, as well as alleviate the costs to its residents. Only Hawaii's citizens pay a higher cost for their electricity. This is a significant engineering problem as well as a financial one."