THERE MAY BE ONLY ONE WAY TO SAVE PUERTO RICO
All of the island’s debt should be wiped out, Trump and others say
Puerto Rico’s attempts to slash its massive debts have taken on greater urgency after Hurricane Maria devastated the island, leading to President Trump’s comments Tuesday that the U.S. territory’s liabilities should be eliminated.
But the island’s economic crisis has been long in the making.
Although Maria escalated Puerto Rico’s financial chaos into a humanitarian crisis, the island had already been reeling from years of financial missteps and economic struggles.
“There’s no way for Puerto Rico to be able to rebuild, let alone recover, unless the debt is canceled,” said Eric LeCompte, executive director of Jubilee USA Network, a religious coalition that’s fighting for Puerto Rico debt relief. “Fortunately for Puerto Rico that process is in place.”
The process looks a lot like bankruptcy. Puerto Rico, which filed for the equivalent of federal bankruptcy protection in May, owes $74 billion in debts and more than $53 billion in unfunded pensions.
A federal oversight board is aiming to negotiate debt cuts with creditors in a case overseen by U.S. District Court Judge Laura Taylor Swain of the Southern District of New York.
Although Trump’s proposal to slash all of Puerto Rico’s liabilities may not be financially or politically realistic, it’s increasingly likely that financiers and individuals who lent money to Puerto Rico will suffer huge losses as political momentum mounts for action.
“They owe a lot of money to your friends on Wall Street, and we’re going to have to wipe that out,” Trump told Fox News. “You can say goodbye to that.”
After Hurricane Maria obliterated the island’s infrastructure, including power and communications, damage estimates range from $40 billion to $80 billion, according to catastrophe risk-modeling software company AIR Worldwide.
Bond holders are nervous. The island’s general obligation bonds tumbled to an all-time low after Trump’s comments, according to Credit Sights.
If Puerto Rico’s debts were canceled, a wide range of investors — including mutual funds, pension funds, retirees and individual investors — would face significant losses. Some of those losses could be covered by bond insurance, though most investors would be stuck with red ink.
Lawrence Summers, a former economic adviser to President Obama, backed up Trump’s proposal in a series of tweets Wednesday.
“President @realDonaldTrump is right. Puerto Rico’s debt should be wiped out,” Summers said. “If ever there was a case for a full debt write off, it’s Puerto Rico.”
A spokesperson for the island’s oversight board was not immediately available for comment Wednesday.
But the board asked for emergency funds Tuesday in a letter to congressional leaders, saying that “your immediate and bold assistance is urgently needed to minimize loss of life, support critical emergency response efforts and provide tools to support the island’s recovery.”
Puerto Rico’s bankruptcy case has been moving at a snail’s pace compared to typical bankruptcies. That leaves open the possibility for federal action.
“They were in the very early stages, and it hasn’t even been established yet if Puerto Rico is eligible to enter the bankruptcy process or if the bankruptcy process created by Congress is legal,” Municipal Market Analytics partner Matt Fabian said.
Aid to help ease Puerto Rico’s financial crisis could take the form of a change to the federal law governing the case to make it easier for the island to restructure, Fabian said. It could also take the form of federal guarantees on loans to the island, he said.
With a poverty rate of nearly 50%, the island’s population could fall from 3.4 million before the hurricane to 3 million by the end of the year, making the island’s debts even more “unpayable,” Fabian said.