Puerto Rico And Politics! (Video)

Puerto Rico default

Yesterday, May 2, the Puerto Rico Government Development Bank defaulted on approximately $422 million in debt payments!

Long in fiscal disarray, this missed payment by Puerto Rico was merely the opening salvo in the Island’s debt crisis as over the summer approximately $2 billion more is going to be coming due.

Consider for a moment why this default is so concerning for a multitude of American investors and not only for the people of Puerto Rico who are personally and physically entangled in the crisis.

If my memory as a former municipal bond analyst serves me (albeit back to a time when information was stored on microfiche and communication was accomplished using faxes on heavy paper), the bonds of Puerto Rico issuers are triple-tax exempt for U.S. investors.

What this means is that if an investor in a high-tax state like New York, California or Massachusetts buys these bonds, it’s as if they are buying their own states tax-exempt paper.

And when I use the word investor, this includes individuals, hedge funds as well as widely held tax-exempt mutual funds.

Another reason for the popularity of Puerto Rico bonds is when a state does not have a deep supply of municipal bonds issued within its own borders. Investors there can look to Puerto Rico as well.

But truth-be-told, particularly in the new normal of ZIRP (the Fed’s zero interest rate policy), additional investors that don’t fit into the two categories mentioned above are also buyers of Puerto Rico paper for another historically atypical reason.

Bonds issued by Puerto Rico entities have tended to have juicy (higher) yields relative to similarly rated bonds found elsewhere around the country.

Why, you may be asking yourself, do these bonds need offer higher yields to entice buyers to buy them?

If we go back to Investing 101 the answer is basic: Higher Risk = Higher Reward!

Is Puerto Rico America’s Greece?

So how did Puerto Rico get to a point where it became so heavily debt-laden that it went into a state of crisis culminating in yesterday’s default?

The island’s economy has been in recession since 2006, and Puerto Rico’s government borrowed aggressively to balance its budget. It has around $70 billion in debt, up from $24 billion in 2000. To skirt debt-sustainability requirements, it devised new bond issues with competing security pledges.

Today, many creditors lament the island’s deep political dysfunction that they say has failed to properly collect taxes or rein in a bloated public sector. But these problems are not new and some investors were willing to tolerate them for years because they believed that the island’s economic problems would eventually turn around. Also, unlike other municipal bonds, Puerto Rican debt is exempt from local, state and federal taxes, which made them an attractive investment during an era of low yields…‘ (Source)

Changing the numbers and replacing Puerto Rico with Greece the stories, and the problems that are facing these two debt-issuing entities, sound very similar.

Real Solutions Will Be Hard To Produce, PARTICULARLY In An Election Year!

What all of this means is that any ‘solution’ will likely entail more kicking of the can down the road by Congress, with debate surrounding it that will undoubtedly be laced with ideological vitriol intended to pander for votes for the upcoming presidential and ancillary elections!

Here’s a small taste of the rhetoric to come as a potential solution for a bad situation is explored…

The default was the largest in a series of missed payments by the struggling U.S. territory since last year and Gov. Alejandro Garcia Padilla warned it was unlikely to be the last.

Puerto Rico has payments totaling nearly $2 billion coming due on July 1, including about $700 million in general obligation bonds that are supposed to be guaranteed under the island’s constitution. In an ominous warning directed at Congress and creditors that include U.S. hedge funds, Garcia said the outlook for the next payment is bleak.

“We don’t anticipate having the money,” he told a news conference in the capital, San Juan.

The remedy, Garcia warned, is either a restructuring arrangement with creditors or legislation from Congress. U.S. lawmakers left for recess last week while a bill that would restore Puerto Rico’s legal authority to restructure as states are able to do and set up a fiscal control board was stalled in committee.

Garcia, who inherited the crisis when he took office in January 2013, blamed lobbying by “vulture” hedge funds and what he called “racist” attitudes toward Puerto Rico.

“Our worst enemy at the moment is politics,” he said.

White House spokesman Josh Earnest said Monday’s default should be another red flag for Republicans in Congress. “This situation requires an urgent response and Republicans in Congress have been dragging their feet for too long,” Earnest said.

The White House has put forward a plan that would allow Puerto Rico’s government to restructure its debt and impose new oversight on finances, among other measures. Earnest said the oversight measures distinguish the proposal from a bailout — a charge Republicans have lodged against the plan. But, Earnest warned, continued delay in Congress “only makes a bailout more likely”….‘ (Source)

Stay Tuned!

Michael Haltman is President of Hallmark Abstract Service in New York. He can be reached at mhaltman@hallmarkabstractllc.com

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