Trump P.R. `Wipe Out’ Is Dis­puted

The Bond Buyer - - Front Page - BY ROBERT SLAVIN

Puerto Rico’s debt can­not be can­celed by or­der of the pres­i­dent, re­struc­tur­ing ex­perts and a key con­gress­man said, af­ter Pres­i­dent Trump sent the ter­ri­tory’s bonds tum­bling with a com­ment that the debt would have to be wiped out af­ter Hur­ri­cane Maria.

Puerto Rico bonds fell to record lows Wed­nes­day af­ter Trump said in a Fox News in­ter­view Tues­day night:

“They had $72 bil­lion in debt be­fore the hur­ri­cane hit…. We have to look at their whole debt struc­ture. You know they owe a lot of money to your friends on Wall Street. We’re gonna have to wipe that out. That’s gonna have to be – you know, you can say good­bye to that.”

In a tele­phone press con­fer- ence on Wed­nes­day, Rep. Rob Bishop, R-Utah, who chairs the House com­mit­tee that over­sees Puerto Rico, said the cur­rent debt re­struc­tur­ing would pro­ceed un­der the Over­sight Board ap­pointed last year.

“Part of the rea­son to have a board was to have a log­i­cal ap­proach [to the debt re­struc­tur­ing]. We need to have this process played out” he said. “There’s not go­ing to be one quick panacea to a sit­u­a­tion that has de­vel­oped over a long time,” said Bishop, chair of the House Com­mit­tee on Nat­u­ral Re­sources. “I don’t think it’s time to jump around … when we al­ready have a struc­ture to work with.”

Bishop said that Hur­ri­cane Maria’s dev­as­ta­tion would re­quire the board to re­vise its 10-year fis­cal plan.

The goal to have a bal­anced bud­get will have to be pushed back from the cur­rent tar­get of fis­cal year 2019.

How­ever, Bishop also re­peated that the board must re­tain its in­de­pen­dence from Congress.

Bishop said the mem­bers of Congress would con­sider ex­tend­ing some­thing like the Puerto Rico Over­sight, Man­age­ment, and Eco­nomic Sta­bil­ity Act to the U.S. Vir­gin Is­lands.

This would open the door to a

debt re­struc­tur­ing for the more than $2 bil­lion in pub­lic sec­tor Vir­gin Is­lands debt.

As re­cently as Sept. 12 Puerto Rico’s 2014 gen­eral obli­ga­tion bond ma­tur­ing in 2035 had been trad­ing at 59.25 cents on the dol­lar, ac­cord­ing to Markit. Due to Maria’s im­pact on the is­land the price had sunk to 44.5 cents by Tues­day.

On Wed­nes­day morn­ing, af­ter the pres­i­dent’s re­marks the bond had plunged to 36 cents, ac­cord­ing to Markit.

Mu­nic­i­pal bank­ruptcy ex­pert James Spi­otto said it would be Congress rather than the pres­i­dent that would pass any bank­ruptcy leg­is­la­tion.

He added that it had al­ready done that with the PROMESA.

“You can’t just use an edict to wipe out debt,” Spi­otto said. “If Congress were to wipe out debt, there would be con­sti­tu­tional chal­lenges.

“Past ef­forts to re­pu­di­ate debt debts have had very se­ri­ous con­se­quences in terms of fu­ture ac­cess to cap­i­tal mar­kets and cost of bor­row­ing,” Spi­otto said.

If the fed­eral gov­ern­ment were to pro­vide some­thing like the Mar­shall Plan to Puerto Rico, Spi­otto said, the econ­omy could strengthen and the is­land would be in a po­si­tion to pay off some its debts.

In the Mar­shall Plan the United States pro­vided mainly grant money to West Euro­pean na­tions from 1948 to 1952. Many of the na­tions’ economies had been strug­gling in the years fol­low­ing World War II.

A bond trader agreed that a Mar­shall Plan was a good idea.

“The muni mar­ket is very much con­cerned about the sanc­tity of the debt con­tract, es­pe­cially as it has been un­der at­tack in places in Detroit,” the trader said.

“Fur­ther­more,” the trader said, “there isan im­plied at­tack on the se­cu­rity of U.S. Trea­sury debt here – which is a re­ally big deal.”

The trader said, “I think [the debt] should trade higher af­ter the im­pact of the pres­i­dent’s state­ment con­cern­ing wip­ing out the debt fades, but I don’t think it will move back to the 50 price we saw last month.”

U.S. Rep. Ny­dia Velázquez, D-N.Y., said debt re­lief is needed.

“It seems one of the few pos­i­tives out of the pres­i­dent’s trip to Puerto Rico is an ac­knowl­edg­ment of how the is­land’s debt will con­strain its phys­i­cal and eco­nomic re­cov­ery,” she said.

“While I agree with the sen­ti­ment that some­thing will need to be done to ad­dress the is­land’s fi­nan­cial chal­lenges, the pres­i­dent failed to lay out any specifics as to how he would ‘wipe out’ Puerto Rico’s debt,” she said.

“I’ve ad­vo­cated for ad­di­tional fund­ing to ad­dress Puerto Rico’s loom­ing Med­i­caid cliff, a long term fix for the is­land’s Med­i­caid short­age, a line of credit from the Trea­sury Depart­ment to as­sist with short term liq­uid­ity is­sues, and a ro­bust fund­ing pack­age to pay for dis­as­ter re­cov­ery.”

Mick Mul­vaney, di­rec­tor of the White House bud­get of­fice, walked back the pres­i­dent’s com­ments. “I think what you heard the pres­i­dent say is that Puerto Rico is go­ing to have to fig­ure out a way to solve its debt prob­lem,” he said, ac­cord­ing to Bloomberg News.

In Wed­nes­day’s press con­fer­ence Bishop said that a fund­ing pack­age to aid Puerto Rico was be­ing de­vel­oped in Congress.

In ad­di­tion, he said mem­bers of his com­mit­tee and other rep­re­sen­ta­tives would meet later Wed­nes­day to dis­cuss tem­po­rary mea­sures to re­duce gov­ern­ment rules slow­ing Puerto Rico’s re­cov­ery.

The group will look at ways to make Puerto Rico’s and the U.S. Vir­gin Is­land’s elec­tri­cal sys­tems more re­sis­tant to storms.

He said the group would be look­ing at how to im­prove things in both ter­ri­to­ries in the short-, medium-, and long-term.

Pres­i­dent Trump said Puerto Rico’s debt would have to be wiped out af­ter Hur­ri­cane Maria.

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