The Treasury Department has argued that Puerto Rico’s restructuring will not be successful if all debts are not on the table. Puerto Rico now finds itself in a $72 billion hole of debt which some have compared to the debt crises in Greece or Detroit.
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Proposals from the White House and Congress to help Puerto Rico restructure its debt do not include plans for taxpayers to pay Puerto Rico’s debt, though politicians pushing the proposals say if they are not adopted US taxpayers could ultimately be on the hook. Reuters reports that Puerto Rico owes $1.9 billion in debts by July 2016.
Anonymous conservative groups have spent hundreds of thousands of dollars in untraceable “dark money” on an advertising campaign that targets legislators in Washington and attempts to portray the bill as a “bailout” of Puerto Rico.
Puerto Rico has been in an economic recession for roughly 10 years, caused by several factors.
The territory’s unemployment rate is 12.2 percent, more than double the 5 percent unemployment rate for the U.S. Residents have been leaving the territory in search of new opportunities.
Why did Puerto Rico miss its payments? Failure to repay could spark the single largest municipal debt default, which would prompt the very service cuts the governor staved off, with draconian reductions to things like electricity and pensions.
“If this observation is confirmed, we are experiencing the largest exodus in the history of Puerto Rico, and in the years when the history of the current wave of immigration is written it will be described as the Second Great Migration and Second Great Exodus of Puerto Rico, ” Dr. Mario Marazzi-Santiago, the executive director of the institute, said in the translated statement. Congressional aides said Monday they agreed that the latest default showed an urgent need to establish federal oversight and restructuring powers for Puerto Rico, but they could not see a way to speed up the process.
Details are not yet settled, but investors expect that the Government Development Bank will be taken over by a “receiver”-a manager appointed by the stiffed creditors with a mandate to restore solvency or shutter the Government Development Bank, returning necessary functions to the Treasury of Puerto Rico”.
The GDB last week said it reached a deal with credit unions to avoid defaulting on about $33 billion of the debt payments due Monday. Some of these bonds, due July 1, are considered what’s known as general obligation bonds issued directly by Puerto Rico’s government and are constitutionally protected.
That message, combined with the success of the independent GDB-creditor talks, may not offer the emergency punch needed to unstick the barriers in Congress to passing a bill to help San Juan work though its debt issues.
Remaining in legal and financial limbo would likely push the island’s economy into even steeper economic turmoil. “We would have preferred to have had a legal framework to restructure our debts in an orderly manner”, the Governor conceded.
Major hedge funds are playing the debt crisis by purchasing at low prices the troubled debts of Puerto Rico in hopes of cashing in for a 20 percent profit if bankruptcy is granted.
While bond yields are generally viewed as an indicator of risk associated with the investment, Mr. Rosenbluth said, “There are some active managers who believe the credit risk of a security is different from what the rating agencies are saying”.
It would create a financial oversight authority that would approve budgets submitted by Puerto Rico’s governor and subsequently passed by the local legislature. According to 1984 legislation, Puerto Rican municipalities are denied that right, though it is retained by towns and cities across the 50 states. If Puerto Rico does default on a particular bond that is insured, the bond insurance companies would be obligated to cover the principal and interest.
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The immediate impact on world bond markets of Monday’s default was expected to be muted.
