SAN JUAN (Reuters) - A protracted shutdown of the U.S. government would hurt many states but would have an outsized impact on the debt-ridden territory of Puerto Rico, where federal funding provides nearly 40 percent of all government revenue, economists said on Tuesday.

The threat to the Caribbean Island's economy, already sliding into recession, stems from the first shutdown of the U.S. government in 17 years over a political standoff between Democratic President Barack Obama and congressional Republicans.

About half of the 10,000 federal government workers in Puerto Rico will be affected by the shutdown, which began on Tuesday, said Alexander Alvelo, president of the local chapter of the American Federation of Government Employees (AFGE).


Even the temporary loss of as many as 5,000 jobs could be enough to raise the unemployment rate on an island with fewer than 900,000 jobs. The unemployment rate is already the highest of any U.S. state or territory at 13.9 percent. And the economy, which last year emerged briefly from recession after six years, contracted by 5.4 percent in August from its level a year earlier.

With a projected deficit of $820 million for this fiscal year, Puerto Rico is a major issuer of bonds that are exempt from federal, state and local taxes. Puerto Rico's debt amounts to nearly 2 percent of the $3.7 trillion municipal bond market.

Heightening worries about the territory's shrinking economy, its jobless rate and per capita debt far higher than that of any U.S. state prompted a bond sell-off with some yields spiking as much as 10 percent.

A 2039 Puerto Rico general obligation carrying a 6 percent coupon was traded on Tuesday at 71.5 cents on the dollar, yielding 8.81 percent, little changed from 8.98 percent on Monday.

"Around 27 percent of Puerto Rico's personal disposable income depends on federal government payments," said Gustavo Velez, an economist at Inteligencia Economica. "I am concerned that in this environment, Puerto Rico's economy looks very vulnerable to any change of these federally funded programs."

He added, however, that for the time being at least most of these programs are not affected by the shutdown.


Puerto Rico relies on federal funding for 39.6 percent of the money it spends, according to a report by Bank of America Merrill Lynch. That's more than any state and the U.S. average of 26.2 percent.

"I am worried about my finances. As a single mom, head of household with three kids, I don't know how long I will be able to sustain this," said Brenda Reyes, an employee of the Environmental Protection Agency and a member of the AFGE union.

Reyes and other federal employees in Puerto Rico have already been coping with mandatory furloughs, or unpaid days off, stemming from automatic spending cuts to the federal budget, known in Washington as "sequestration."

Under the across-the-board cuts, Puerto Rico has lost $129 million over a six-month period, and is slated to lose $260 million during the next federal fiscal year, according to the Office of Management and Budget. The cuts have affected many branches of government such as the Health, Education, Housing and Labor Departments.

Tuesday's government shutdown could impact important federal spending programs in Puerto Rico like the Temporary Assistance to Needy Families and Special Nutritional Supplemental Assistance for Women, Infants and Children.

Authorities are, however, studying options to keep providing these services using surpluses from previous years.


The federal shutdown will mainly affect non-essential government services that depend on discretionary spending programs.

Less than half the $6.6 billion Puerto Rico receives through several federal spending programs are considered discretionary, said Ingrid Vila Biaggi, chief of staff to the territory's governor.

(Reporting by a Reuters correspondent in San Juan; Additional reporting and writing by Tiziana Barghini in New York.; Editing by Christopher Wilson)