The Rendon Group Snapshot Report – 09 May 2016

by TRG Alerts Admin on May 16, 2016

The Rendon Group

(09MAY16)

Each week The Rendon Group’s media analysts will focus on a different continent and a different issue affecting that continent. As always, we remain available to answer any questions you may have and to provide additional information upon request. For more information regarding The Rendon Group’s products and services, please contact us at Alert@Rendon.com or +1-202-745-4900.

Puerto Rico defaults on debt while Congress delays action

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A store under liquidation in San Juan, Puerto Rico. The island has been mired in a recession since 2006. (Erika Rodriguez/Bloomberg)

This week’s snapshot focuses on the Puerto Rico debt crisis. The economy of the US territory faltered after the US ended a favorable tax scheme for the Caribbean island, and local government initiatives to boost growth fell far short of expectations. The local government is USD $70 billion in debt, and is prohibited by law from bankruptcy protection. The government defaulted on its debt on 02MAY, and warned that it will not be possible to make larger payments to its creditors this summer. Congress is considering action to help the island restructure some of its obligations, but intensive pressure by hedge funds has delayed action.

News summary of events during the week of 02MAY16 – 09MAY16

  • 01MAY: Gov. Alejandro García Padilla of Puerto Rico ordered a debt moratorium, blocking a USD422 million payment due on 02MAY. (NYT)
  • 02MAY: Gov. Alejandro García Padilla’s decision to institute a moratorium on debt payments will be challenged by the Government Development Bank’s (GDB) creditors, and could spawn costly lawsuits and perpetuate more economic uncertainty for the island. (Reuters)
  • 02MAY: The GDB said it reached a deal with some creditors to continue negotiating a debt restructuring, potentially stemming the expected lawsuits arising from the default. (Reuters)
  • 02MAY: US Treasury Secretary Jacob J. Lew called on Congress to act swiftly, warning that Puerto Rico is in danger of getting caught in “a series of cascading defaults” that could lead to a taxpayer bailout. (NYT)
  • 02MAY: White House spokesperson Josh Earnest pressured Republican congressional leaders to act on restructuring Puerto Rico’s debt. (AP)
  • 03MAY: House Speaker Paul Ryan’s office said legislation to help Puerto Rico deal with its USD72 billion debt crisis “is being finalized” by a congressional committee following negotiations with the Treasury Department. (Reuters)
  • 05MAY: Presumptive Republican presidential nominee Donald Trump called for a write-down of Puerto Rico’s debt (WSJ)
  • 06MAY: Gov. Alejandro García Padilla said Puerto Rico also will not make an USD800 million payment that is due 01JUL. (WSJ)
  • 06MAY: Puerto Rican authorities launched a campaign to keep the fear of Zika from scaring tourists away, one of the few sectors of the economy that is prospering amid a generalized recession. (EFE)
  • 07MAY: The local Planning Board estimated that Puerto Rico’s economy will contract by 1.2 percent during the current fiscal year, which ends on 30JUN, and 2 percent over the following 12-month period. (EFE)
  • 09MAY: Treasury Secretary Jacob Lew traveled to Puerto Rico as part of a campaign to pressure Congressional Republicans into action. (AP)
  • 09MAY: The chairman of the House of Representatives’ Natural Resources Committee Rep. Rob Bishop said that legislation to address Puerto Rico’s growing debt and humanitarian crisis will be introduced for discussion 11MAY with a committee vote a week later. (Reuters)

Sample of Twitter handles tweeting about the Puerto Rico debt crisis

  • @AGelpern – Anna Gelpern, Professor of Law, Georgetown University
  • @Eric_LeCompte – Eric LeCompte, Executive Director, Jubilee USA Network
  • @Lin_Manuel – Lin-Manuel Miranda, Actor and Playright of Puerto Rican heritage
  • @NegrnDaz – Santos Negrón Díaz, Economist and Stategic Planner, Sincomillas.com blog about Puerto Rico’s economy
  • @NickTimiraos –  Nick Timiraos, National Economics Correspondent, Wall Street Journal

Sample of Third Party Validators regarding the Puerto Rico debt crisis

Scott Greenberg, Analyst, Tax Foundation

[Federal tax breaks from 1976 to 2006] “created a kind of bubble that burst when the mechanism expired in 2006. It didn’t create a sustainable growth model for Puerto Rico, because the companies were only investing there because of the tax benefits, and because Puerto Rico failed to capitalize on the business activity to develop its economy.”

  • “Puerto Rico, a US tax haven in tatters,” AFP, 06MAY16

Argeo Quinones-Perez, Economics Professor, University of Puerto Rico

“No effort was made, no industrial policy was decided, no plans were made. We should have obtained more benefits by requiring job creation or direct investment on the island.”

  • “Puerto Rico, a US tax haven in tatters,” AFP, 06MAY16

Marc Joffe, Principal Consultant, Public Sector Credit Solutions

[The hedge funds that hold the debt] “are assuming that they can do very well given what happened with Argentina. Holders of the 2014 debt are going to be better off, because they’re litigating in New York.”

  • “In Puerto Rico’s Debt Crisis, Shades of Argentina,” WSJ, 04MAY16

Arturo Porzecanski, Distinguished Economist in Residence, American University

“The government has known the GDB was a ticking time-bomb and yet nothing constructive was done to forestall a default. The approach is symptomatic of all that is wrong with how Puerto Rico has dealt with its deteriorating financial situation.”

  • “Puerto Rico declares moratorium on Government Development Bank’s debt,” Reuters, 02MAY16

Matt Fabian, Managing Director, Municipal Market Analytics

“There’s too much discord. This was supposed to be a very controlled process, and it just got out of hand.”

  • “Puerto Rico Debt Deadline Looms With Washington Still Haggling,” NYT, 29APR16

Sample of open source research conducted by TRG analysts related to the Puerto Rico debt crisis

  1. Puerto Rico Governor Warns of Another Default

Media: Wall Street Journal

Byline: Nick Timiraos

Date: 06 May 2016

“As of today, the answer is no, I don’t think we will be able to come up with an idea to have that money,” Mr. García Padilla said Friday in an interview for C-SPAN’s “Newsmakers” conducted by a pair of reporters, including one from The Wall Street Journal.

The island’s Government Development Bank on Monday missed most of a $422 million payment, the largest so far by the island. The default had been largely expected because the GDB was viewed as insolvent.

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  1. EDITORIAL: Puerto Rico’s looming Katrina-style disaster

Media: Financial Times (UK)

Byline: N/A

Date: 05 May 2016

If Puerto Rico were a US state, or an independent sovereign, it would long since have declared bankruptcy. Instead, the cash-starved island is subsisting in a legal limbo that closes off any means of restructuring its debt. On Monday it defaulted on a $422m bond payment. In July, it will almost certainly miss a $1.4bn payment that will trigger a lengthy court battle to rival that of Argentina.

It does not have to be this way. A bill before Congress would put the US territory under an independent board that would have the power to restructure its debt. It is supported both by Paul Ryan, the Republican speaker of the House of Representatives, and the Obama administration.

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  1. ANALYSIS: In Puerto Rico’s Debt Crisis, Shades of Argentina

Media: Wall Street Journal

Byline: Nick Timiraos

Date: 04 May 2016

WASHINGTON—Puerto Rico’s economic trouble has prompted comparisons to Greece, but a better analogy might be Argentina.

Hedge funds that bought billions of dollars of Puerto Rico’s debt two years ago are resisting a broader restructuring in hopes of preserving their rights to be paid off first and in full.

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  1. Default at hand, Congress faces new pressure to act on Puerto Rico

Media: Washington Post

Byline: Mike DeBonis

Date: 02 May 2016

Hours before Puerto Rico missed hundreds of millions of dollars of bond payments, U.S. Treasury Secretary Jack Lew on Monday issued a new and urgent call for Congress to pass legislation allowing the territory to restructure the $72 billion it owes to creditors.

In a letter to House Speaker Paul D. Ryan (R-Wis.), Lew connected the island’s fiscal crisis to the mosquito-borne Zika virus, which has spread through the Caribbean and was recently confirmed to have claimed its first life on U.S. soil — a 70-year-old Puerto Rican man who died in February from a bleeding disorder linked to Zika.

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  1. Puerto Rico to Miss Largest Payment to Date

Media: New York Times

Byline: Mary Williams Walsh

Date: 01 May 2016

Gov. Alejandro García Padilla of Puerto Rico said Sunday that he had ordered a debt moratorium, blocking a $422 million payment due on Monday.

The missed payment is the biggest yet in a continuing series of defaults by the struggling United States territory, and a warning that Puerto Rico will probably default on even larger and more consequential payments due on July 1, unless Congress enacts rescue legislation before then.

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