The president spooked the bond market Tuesday when he went to storm-damaged Puerto Rico and said more than $70 billion of the island’s debt should be “wiped out.”
That drove Puerto Rico general-obligation bonds to a record low. As investors despaired of getting paid, you could buy them for 32 cents on the dollar, down from 60 cents last week. Which was already a steep discount, because the U.S. territory’s government went into bankruptcy last spring and Hurricane Maria wrecked the island last month.
Religious leaders cheered Trump: “Forgive us our debts, as we also have forgiven our debtors,” Catholic Archbishop Roberto Gonzalez Nieves and other holy men from Puerto Rico and the neighboring U.S. Virgin Islands responded in a letter, quoting the Gospel of Matthew. Puerto Rico’s debts, they wrote, “must be canceled and reduced to sustainable” payments.
Yet on Wednesday, Trump’s budget director, Mick Mulvaney, dismissed any idea of new billions heading south, telling Bloomberg LP that “we are not going to bail them out. We are not going to pay off those debts.”
Trump used bankruptcy to escape his casino creditors in Atlantic City. But without new billions from Washington — on top of emergency hurricane relief — Gov. Ricardo Rosselló said the island would continue its orderly bankruptcy. The storm had already given him a stronger hand forcing creditors to accept less.
Puerto Rico’s financial settlement, like its poverty, is tied to the old, sore question of the island’s political status, says Eric LeCompte, who runs a Washington group, Jubilee USA Network, that represented Catholic bishops and other religious organizations in talks that led to the U.S. law that made the bankruptcy possible.
Boricuas — the islanders — have long divided between the governor’s New Progressive Party, which wants Puerto Rico to be the 51st state; the opposition Popular Democratic Party, which wants to remain a Spanish-speaking territory with improved self-government (and U.S. aid); and the Independence Party, strong on talk, but short on votes.
The process approved by Roselló’s government, U.S. District Judge Laura Taylor Swain, and creditors in May resembles a Chapter 11 corporate reorganization, LeCompte says. “There is a debt moratorium.” Puerto Rico had agreed to resume paying its creditors and investors at about one-quarter the previous level for the next 10 years. There is the expectation that the antiquated oil-burning power system and other public property may be sold to creditors; maybe a new electric grid could use the island’s sun and wind potential. And now, since the tragic storm, “we are looking at much more of the debt as being canceled.”
Would canceling billions in debt hurt only rich investors such as Goldman Sachs, as Trump put it Tuesday? “If you have a retirement fund, there’s a good chance you own Puerto Rico debt,” though much has already been bought at loss prices by hedge funds, LeCompte tells me.
Johnson & Johnson and other large U.S. companies have factories in Puerto Rico. But “most of the business left” when U.S. tax breaks expired in the 2000s, LeCompte says. As the factory, farm and tourist industries all slowed, Puerto Rico borrowed to continue services, “kicking the can down the road, which is what territories, states and countries do, as opposed to dealing with the reality.”
Meanwhile, hundreds of thousands of Puerto Ricans fled to the U.S. mainland. “You can buy a $60 one-way ticket to Miami or an $89 ticket to New York, and you are a citizen here,” LeCompte says. Residents of storm-wracked, independent, and broke Caribbean islands such as Dominica and Antigua-Barbuda are still more desperate, seeking shelter from relatives abroad. Those islands face effective takeover by the International Monetary Fund.
Could even rich U.S. states such as Pennsylvania and New Jersey, where politicians try to paper over billion-dollar budget gaps by urging residents to gamble more, get like this? Bankruptcy and forgiveness aren’t enough, LeCompte concludes: “There need to be protections in place for responsible lending and responsible borrowing. Public budget transparency. Bond market regulations. Or you’ll get more financial crises as bad as things got in Puerto Rico.”