Garcia said he had issued an executive order suspending payments on debt owed by the island’s Government Development Bank, a default that likely will prompt lawsuits from creditors and could be a prelude to a deadline to a much larger payment due July 1. This is the largest default in a series of other bankruptcies, and deepens the island territory’s precarious financial situation.
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The Puerto Rican government and its subsidiaries managed to rack up more than $70 billion in outstanding debt over the course of several years but have previously indicated that they simply would not be able to repay what they owe in full.
The fund company Oppenheimer has exposure to Puerto Rican debt through its Rochester line of funds and Franklin Templeton has exposure through its Franklin Double Tax-Free Income Fund. Investors who own those mutual funds or individual bonds should talk with a wealth adviser.
These debts don’t even include an additional $43 billion of unfunded pension liabilities. All the government has done is raise taxes, with the sales tax recently hiked from 7 to 11.5 percent.
Impact of tax policy shift:The impact of the expiration of Section 936 is stark when looking at percent GDP growth in Puerto Rico. It’s no coincidence that, having made such an investment, they advocate Chapter 9 bankruptcy as the remedy for the Puerto Rico’s debt crisis. Garcia Padilla insisted Monday on the need for Washington to intervene before July 1 to approve some mechanism permitting the island to declare bankruptcy under the protection of federal legislation from which it was excluded in 1984 thus enabling it to undertake an orderly restructuring of its debt. The statistics are heartbreakingly bleak: nearly half the residents are in poverty (and more than half of all children); only about 40 percent of adults are even in the workforce; half of families collect welfare benefits; and more than 10 percent of the island’s residents have left for Florida, Texas, New York or other safe havens.
Puerto Ricans moving to another part of the United States are not “refugees”; they are American citizens, and have been granted formal American citizenship since March 2, 1917. Ryan and other GOP leaders argue the bill is not a bailout because no US taxpayer money would be at a stake.
How did Puerto Rico get into such a mess?
Here is what shouldn’t happen: a financial cash bailout from US taxpayers.
According to Morningstar, OppenheimerFunds makes up 17 of the top 20 funds ranked by allocations to Puerto Rican bonds.
Opting for a bailout would be like throwing good money at bad behavior, which would only serve to encourage it in the future.
At present, Puerto Rico’s debt amounts to $72 billion. “These migrants will spend their most productive years off the island and they take their economic activity with them”. So the bondholders will be punished by the marketplace.
Compounding the problem is Puerto Rico’s dwindling workforce.
House Speaker Paul Ryan (R., Wis.) has forcefully rallied Republicans to back the legislation, the product of unusually bipartisan discussions with the Treasury Department.
In a statement late Sunday night, GDB said it reached “indicative terms” of a deal with the creditor group holding about a quarter of the almost $4 billion in bonds, under which the group would agree to a two-step debt exchange, ultimately recouping about 47 percent of what they are owed.
This is the third time the island has defaulted on bond payments.
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Referencing the $422m payment, due on Monday until the moratorium was agreed, Mr Garcia Padilla said he “had to make a choice” between creditors’ demands and essential services for Puerto Rico’s population of 3.5m people.
