Drowning in Debt: Puerto Rico warns of more defaults after missing loan payment

PR Debt Crisis
May 2016PUERTO RICOPuerto Rico’s debt crisis moved into a more perilous phase for residents, lawmakers and bondholders Monday after the Government Development Bank failed to repay almost $400 million. The missed principal payment, the largest so far by the island, is widely viewed on Wall Street as foreshadowing additional defaults this summer, when more than $2 billion in bills are due.
Together with the spread of the Zika virus, the risk of cascading defaults is putting new urgency on bipartisan negotiations in Washington over legislation granting the U.S. territory new powers to restructure more than $70 billion in debt. The Centers for Disease Control and Prevention reported last week the first U.S. death related to the mosquito-borne Zika virus—a Puerto Rican man in his 70s who died in late February.
In a letter to Congress, Treasury Secretary Jacob Lew warned on Monday that a U.S. “taxpayer-funded bailout may become the only legislative course available” if the proposed restructuring legislation isn’t approved. The island’s debt is held by mutual funds, hedge funds, bond insurers and individual investors, who were attracted in part by tax benefits and high yields. The default Monday casts serious doubt on the commonwealth’s ability to make other future payments, which “means that other defaults are very likely on other Puerto Rico credits,” said Paul Mansour, head of the municipal credit research group at investment management firm Conning.
Monday’s developments are the latest sign that a long-running economic crisis has reached an acute stage, embroiling financial markets and Congress. Benchmark Puerto Rican bond prices fell to near record lows Monday, with some investors paying less than 65 cents on the dollar for general obligation bonds maturing in 2035, an unusually low price.
Just two years ago, investors snapped up $3.5 billion of those bonds, which carry an interest rate of 8%. While Monday’s default had been expected, it creates new complications for the local government. Its agencies maintain their bank accounts at the GDB, which serves as the government’s fiscal agent and financial adviser and backs loans to private enterprises. The government had already passed legislation to limit withdrawals from the agency to avoid a potential bank run, and the commonwealth’s treasurer last month began opening accounts at private banks.

PR Debt

Puerto Rican Gov. Alejandro García Padilla said in a televised address Sunday that the island was struggling to pay for such basic goods as fuel for police cars. The default could mark a turning point after weeks of negotiations on Capitol Hill. House Republicans are completing legislation to create a federal oversight board for Puerto Rico with the power to sign off on local budgets and to authorize a court-supervised debt restructuring. The bill wouldn’t commit U.S. taxpayer funds, but some creditors have described it as a bailout because they say it might violate existing contracts.
House Speaker Paul Ryan (R., Wis.) has forcefully rallied Republicans to back the legislation, the product of unusually bipartisan discussions with the Treasury Department. Mr. Ryan is warning colleagues that, if the local government can’t manage the crisis, calls for actual taxpayer assistance will mount.
Monday’s developments are the latest sign that a long-running economic crisis has reached an acute stage, embroiling financial markets and Congress. Benchmark Puerto Rican bond prices fell to near record lows Monday, with some investors paying less than 65 cents on the dollar for general obligation bonds maturing in 2035, an unusually low price.Just two years ago, investors snapped up $3.5 billion of those bonds, which carry an interest rate of 8%.
While Monday’s default had been expected, it creates new complications for the local government. Its agencies maintain their bank accounts at the GDB, which serves as the government’s fiscal agent and financial adviser and backs loans to private enterprises. The government had already passed legislation to limit withdrawals from the agency to avoid a potential bank run, and the commonwealth’s treasurer last month began opening accounts at private banks.
Puerto Rican Gov. Alejandro García Padilla said in a televised address Sunday that the island was struggling to pay for such basic goods as fuel for police cars. The default could mark a turning point after weeks of negotiations on Capitol Hill. House Republicans are completing legislation to create a federal oversight board for Puerto Rico with the power to sign off on local budgets and to authorize a court-supervised debt restructuring. The bill wouldn’t commit U.S. taxpayer funds, but some creditors have described it as a bailout because they say it might violate existing contracts.
House Speaker Paul Ryan (R., Wis.) has forcefully rallied Republicans to back the legislation, the product of unusually bipartisan discussions with the Treasury Department. Mr. Ryan is warning colleagues that, if the local government can’t manage the crisis, calls for actual taxpayer assistance will mount. –Wall Street Journal

Financial Collapse

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This entry was posted in Banking Crisis, Bankruptcy, Boom and Bust Cycles, Civil Unrest, Disillusionment, Economic Collapse, Economic Hardship or Loss, Economic impact of natural disasters, Financial market turmoil, Immigration surge, Nations Collapse, Protests, Refugee Crisis, Social Meltdown, Unemployment rising, Unsustainable Debt Burden. Bookmark the permalink.

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