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Puerto Rico defaults on debt while Congress delays action
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
Sample of Twitter handles tweeting about the Puerto Rico debt crisis
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.”
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.”
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.”
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.”
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.”
Sample of open source research conducted by TRG analysts related to the Puerto Rico debt crisis
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.
Media: Financial Times (UK)
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.
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.
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.
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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