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Is Puerto Rico Heading Towards A Federal Bailout?

November 3, 2014 Blog

In the 2008 financial crisis, major banks like Citigroup and Merrill Lynch were on the verge of collapse. We all remember that a taxpayer funded bailout saved those financial institutions.

To avoid a wholesale financial collapse, Puerto Rico, a U.S. territory, may need a similar plan of assistance or some other type of intervention by Congress.

According to a Reuters article, Moody’s reports that Puerto Rico faces “narrowing liquidity” as its “cash dwindles”.
Government officials in Puerto Rico have attempted to make changes in policy and praise the lending environment, but those words have little to do with reality.

“In the past six weeks, Puerto Rico’s junk-rated bonds have slumped while investment-grade municipals have rallied,” writes noted economist and academic Arturo Porzecanski in a new essay.

“Investors have become pessimistic even though the Commonwealth has recently managed to borrow $900 million from a group of banks led by J.P. Morgan, Morgan Stanley and Bank of America,” Porzecanski writes.

“The island’s government was actually hoping to raise $1.2 billion, and it was granted at a punishing interest rate of 7.75 percent. In years past, the Commonwealth had always been able to obtain short-term credit for its seasonal needs at rates below two percent. According to Bloomberg News, the hedge funds which bought Puerto Rico’s last bond issue in March – it was priced to yield an eye-popping 8.75 percent – have been losing confidence and have pared back their holdings.”

It will get worse for Puerto Rico bond holders, Porzecanski writes.

“The market action suggests that sophisticated investors are beginning to realize that Puerto Rico’s economic and fiscal situation is unlikely to turn around anytime soon. The economy has been shriveling for eight years. The first data points for September are the unemployment rate, which rose to 14.1 percent from 13.1 percent in July, and auto sales, which were down 17 percent for the third quarter versus the prior year.”

“The underlying reason is a steady exodus of population and jobs,” according to Porzecanski. “The exodus has led to an erosion of the tax base and to political pressure to salvage government jobs and help vulnerable populations.”

Porzecanski suggests it’s time for Congress to act as it has in the past and create an oversight board to manage the coming crisis.

“Indeed, the fundamentals of Puerto Rico resemble those of New York City in the mid-1970s and of other municipalities on which a Financial Control Board has been imposed. NYC lost a chunk of its middle class and 16 percent of its jobs between 1969 and 1977. It was also saddled with too much debt,” he writes.

Sounds eerily similar to Puerto Rico’s current fiscal condition, doesn’t it?

The coming pain is likely to be felt most by retail investors whose portfolios are concentrated heavily in UBS closed-end Puerto Rico bond funds. While many of these investors have hired investment fraud lawyers to try to recoup their losses, if Puerto Rico runs out of cash, they likely will be left holding the bag.

While a federal bailout is an extreme option, Puerto Rico is running out of time and is looking like the 2008 financial sector.
Zamansky LLC are securities and investment fraud attorneys representing investors in federal and state litigation against financial institutions. For more information about Zamansky LLC, please visit