Amid Puerto Rico debt woes, reality hits San Juan streets

30 Jun 2015 | Author: | No comments yet »

Amid Puerto Rico debt woes, reality hits San Juan streets.

The governor of Puerto Rico said this week he does not think the commonwealth will be able to back more than $70 billion in debt, a scenario that could lead to unprecedented consequences for the island and the rest of the United States. NEW YORK – Puerto Rico’s governor on Monday called for the commonwealth to be allowed to restructure its debts under U.S. bankruptcy code, while a newly appointed adviser to the U.S. territory said it is “insolvent” and will soon run out of cash.

Puerto Rico’s governor says that the territory’s $72 billion in public debt is unpayable and that large-scale restructuring of the debt is required. “There is no other option.WASHINGTON — U.S. lawmakers have no firm plan to help more than 3 million American citizens living 1,000 miles off the coast of Florida under a government staring down the barrel of a $73 billion debt crisis. The financial woes leading Puerto Rico to this point are unique to the territory, and not a sign of the health of the broader municipal bond market, says Matt Fabian, a partner at research firm Municipal Market Analytics. Governor Alejandro Garcia Padilla, in a televised address, said sacrifice must be shared by bondholders, as he called for Washington to allow a bankruptcy debt restructuring. But some ordinary investors, who may have access to Puerto Rican bonds through a mutual fund, may still feel the pain. “There’s very little surprise in what might come from Puerto Rico,” Fabian says. “But nothing is ever fully anticipated so we can’t be sure.” Many municipal bond fund managers cut back on exposure to Puerto Rico as growing worries about the island’s economy increased fears that the government may fall short on its debt payments.

But some fund managers have been increasing their bets on Puerto Rico, making it a good time for people to check where their municipal bond funds are invested, Fabian says. And in the sense of indifference from people who can’t afford to leave and have become used to a hard life. “Were not going up or down; we’re stuck,” said Rosa Arias, a spunky 70-year-old who stopped earning an income three years ago as a babysitter when the parents of those children lost their own jobs. “I manage to eat and sleep, but that’s it. It came to a crunch point on Monday – ironically at the same time as did debt-laden Greece – after a dire report on its stability by former International Monetary Fund economists was released ahead of key deadlines on Wednesday to repay debt.

The comments by the island’s chief executive came as a report was released Monday about Puerto Rico’s economy, laying out a grim picture of the island’s financial health. Puerto Rico also has the highest municipal bond debt per capita of any U.S. state. “Puerto Rico needs a restructuring plan,” García Padilla said in his televised address. “We must act now. … Jose Villamil, a former United Nations consultant and CEO of an economic and planning consulting firm, says he believes that the news will have only a limited effect on financial markets, because it has been known for some time that Puerto Rico has been heading for debt restructuring or default. If the impact on Puerto Rico’s citizenry isn’t enough to spur action by the U.S. government, or by the Wall Street hedge funds that hold a significant stake in the island’s debt, maybe the potential effect of a default on mainland Americans will do the trick. I know it’s not easy but I also know we have no alternative.” The governor said he will begin meeting with legislators and other leaders to discuss how best to resolve the financial crisis.

Previous defaults from other municipalities, including Detroit and Jefferson County, Alabama, had little effect on the broader market, Hampton said in a statement. He has said he wants a debt repayment moratorium of several years and in his address said his administration would lobby Washington for the right to file for bankruptcy under Chapter 9. It’s part of the U.S., and the firms to whom that debt is owed may very well be the firms managing our grandparents’ pensions and our own retirement plans,” Disparte said. Some high-yield muni funds are so heavily invested in Puerto Rico that they may have to sell other types of bonds if they face a rush from worried investors trying to cash out, Fabian says.

Bondholders, even those who own government debt that is generally regarded as sacrosanct, would have to take a hit under the report’s recommendations. Every time he visits, Disparte said he sees the effects — an increasing number of vacant properties. “When you are playing with things this large and this systemic, you need kid gloves and delicacy and order — not, ‘It doesn’t matter to me. The prospect of a debt restructuring spooked investors and sent the price of Puerto Rico’s benchmark general obligation bonds that carry an 8 percent coupon and mature in 2035 74514LE86=MSRB down nearly 10 percent to a record average low of 69.510 cents on the dollar. Additionally challenging for Puerto Ricans, the island’s constitution puts its commitment to pay creditors over all other concerns, including pension payments. “This is a daunting agenda politically, legally, and organizationally,” the so-called Krueger report states. “It is also an urgent one: the government’s cash balances can evaporate in the face of delays, reducing the room for maneuver and intensifying the crisis.” Puerto Rico’s problems started in the mid-2000s, when a federal tax subsidy for manufacturing on the island expired, leading to an exodus of employers and workers for the mainland. Beset with issues like unemployment and revenue shortfalls, the government took to borrowing to balance the budget, until Puerto Rico’s credit level was downgraded to junk status last year.

In 2000, its debt was about 63 percent of gross national product, whereas this year, it is projected to be 100 percent of GNP, according to the Krueger report. The Kruger report looks to the federal government for help in dealing with this particular issue, calling on Congress to lift the exclusion of the island from the nation’s bankruptcy code. The measure ultimately was struck down in court and is currently on appeal. “There are lawsuits here that would happen almost immediately between bondholders and PREPA, between one group of bondholders and other bondholders, and between bondholders and their brokers-slash-dealers, or whoever bought the bonds for them,” Farber said. “So there’s a potential for lawsuits going all kinds of ways.

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