The Importance Of A Scoring System With Five Risk Areas

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The approach I use involves a scoring system with five risk areas that are each scored from one to five, with five being the strongest (least risky) and 0 being the weakest (most risky). The sum of the scores total 25 points. A political risk score of 25/25 is a perfect score or a very safe investment. The Commonwealth of Puerto Rico is assigned a score of 9/25, meaning the island is a highly speculative investment. Support for each of the risk scores can be found below.

Executive Summary

Puerto Rico’s credit risk is speculative in a high degree and the situation on the island has reached crisis levels. The island’s government effectively defaulted on its bond obligations in June 2015, seriously limiting its ability to access the
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The Spanish-American War put the island in the center of the shifting power dynamics between Spain and the United States. After a war and a quick victory, the United States assumed power over Puerto Rico and the two cultures began their complicated political and economic union. As a possession of the United States, the Commonwealth’s economy became directly and often times disproportionally affected by changes in United States policy. The dependent relationship was adopted by both sides with a series of incentives passed by congress that encouraged mainland investors to move money to the island, and the commonwealth passing its own incentive programs to attract mainland companies and investors. The result is today’s dysfunctional Puerto Rican economy that can be described as inefficient and noncompetitive.
The Jones Act of 1920 was one of the major pieces of legislation that fostered the dependent relationship. The Act calls for all products entering or leaving the island by water to be transported by United States vessels. The law was intended as a protectionist measure for U.S. shipping companies, but it created a huge inefficiency where shipping companies will offload and reload products in Florida before heading towards the island. The result is significantly inflated prices on the island, a problem that still exist today, and the lost opportunity in Puerto Rico never developing its
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