Puerto Rico Bets on American Tourists to Repay Debt

Americans have long been in love with Puerto Rico's high-yielding municipal bonds. Now the Caribbean island hopes they will flock to its sand, surf and spanking new resorts to help pay off massive debts.

Without a fix, Puerto Rico's $65.3 billion in outstanding bonds may become difficult to sustain in the long run.

Puerto Rico is a prominent, popular seller of muni bonds. U.S. investors like the debt's fat yields, which come with unusual full exemption from federal, state and local income taxes. The island sold $4.82 billion of bonds in 2012's first four months, or 40 percent more than California.

But with debt equivalent to 103 percent of its annual gross product, the U.S. territory carries a burden that would make troubled states like California and Illinois blanch. The two states' debt levels are just under 5 percent of economic output.

To raise funds, Puerto Rico's government hopes to make tourism as important to the island as in Florida, where about 10 percent of the economy comes from vacationers. Tourism currently accounts for just 6 percent of Puerto Rico's economy, with 3.7 million tourists a year, below nearby Dominican Republic's 4.12 million.

Puerto Rico worries some institutional investors, who are concerned by government budget deficits, an economy struggling to exit a six-year recession and under-funded public pensions.