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Puerto Rico Is Scrambling To Stay Afloat

October 28, 2015 Blog

The Puerto Rico government is struggling to avoid defaulting on its debts.

The next two months are critical for Puerto Rico’s fiscal future; they are also critical for Mom and Pop investors who bought Puerto Rico-backed bonds and bond funds from brokers at UBS and other banks. Puerto Rico is forecast to run out of money by November, with a bond payment of more than $350 million due January 1, 2016.

Puerto Rico Debt: Important Events

Events important to the future of Puerto Rico are unfolding and evolving at an extremely rapid pace.

The Government Development Bank, or GDB, last week reportedly ended talks with a group of bondholders without reaching a deal to restructure its debt. Then, on Tuesday, a report by Michelle Kaske of Bloomberg said that investors in the GDB bonds and Puerto Rico officials were sitting down that afternoon in New York to discuss the island’s liquidity.

The meeting was part of the GDB’s effort “to maintain a constructive dialog with the island’s creditors,” according to a statement by the GDB and cited in the Bloomberg article.

Will those discussions be successful? What twists and turns in the negotiations will next week bring?

Meanwhile, Puerto Rico’s government has recently suggested several ideas to stay afloat. None appear to be gaining any traction.

Puerto Rico’s Governor earlier this month proposed creating a fiscal control board which would have “oversight over nearly all branches of the island’s central government, including agencies and authorities that have issued all but $17 billion of the island’s $72 billion in debt,” according to an article in the New York Times by Mary Williams Walsh. “The island’s big public utilities that provide electricity and water were excluded from the board’s oversight.”

Quite simply, the move to such a board would also be an attempt to restore public confidence in the Island’s ability to continue to pay its debts.

The problem with the fiscal control board is that it would be administering a five year debt restructuring plan that no one has yet agreed to. And there are plenty of serious questions about conflicts of interest and political connections of potential board members.

Another idea that seems to be going nowhere is the creation of a “super bond” in which investors in Puerto Rican bonds would receive new bonds – replacements, essentially – with a lower value but a greater likelihood of repayment, according to a recent Associated Press report. According to the proposal, the super bond payments would be administered by the U.S. Treasury, an idea that doesn’t seem to sit well with Puerto Rican investors.

Puerto Rican Gov. Alejandro Garcia Padilla even had a little face time with U.S. lawmakers last week when he testified before the Senate Committee on Energy and Natural Resources. This was the first testimony by the Governor about Puerto Rico’s financial crisis, and his message was clear. His administration will run out of cash by November and be forced to decide between making debt payments to creditors or providing basic services such as health care, police, fire and education, according to multiple reports.

To this observer of the Puerto Rican debt situation, it seems like there’s a lot of motion and commotion at the moment but zero action to stave the crisis. Indeed, Puerto Rico’s bankers and politicians are in a mad scramble, playing musical chairs, while their ship is sinking.

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