Puerto Rico now belongs to Wall Street
As a result, it finds itself in a uniquely awful position.
It can't enter bankruptcy, according to its own laws, so now it has to deal exclusively with its creditors to restructure its debt.
That means it has to deal with Wall Street.
"I think the surprise was that it happened this quickly," said Brian Kelly, CEO of the Connecticut-based fund Brian Kelly Capital. "We thought it would take six months to a year ... the solution is a debt restructuring."
Of course, when you restructure an economy that is already in tatters, its ability to pay is reduced as it struggles to fulfill its obligations. It can be a vicious cycle.
And once you're in the cycle, Kelly said, "the question is: 'Is this the first domino to fall?'"
Here's the situation: Puerto Rico's economy is in recession with a 14% unemployment rate. With little money coming in, legislators were already debating major cuts to the country's $10 billion budget.
"My administration is doing everything not to default," Gov. Alejandro García Padilla said. "But we have to make the economy grow," he added. "If not, we will be in a death spiral."
But growing out of this is not an option.
For months, even as distressed debt buyers started circling, Wall Street remained optimistic that things would work out.
Earlier this month, bond god Jeff Gundlach of DoubleLine Capital told investors that he thought Puerto Rico would "make it to the goal line," adding that they would, at worst, restructure around 80 cents on the dollar.
That's not looking close to possible now, Kelly said.
A lot of Puerto Rico's debt is in municipal bonds, and thus the country's situation is similar to Detroit's.
But unlike Detroit, Puerto Rico — a US territory — doesn't have the option of using the bankruptcy process to discharge its debt.
Consequently, it will be forced to negotiate with its creditors, making it a little bit more like Greece.
Those negotiations could involve a lengthy slog — such as the one we're seeing in Greece — in which Puerto Rico must constantly go back to the table to restructure with its creditors. It will not be able to access international markets in the state it's in.
Puerto Rico's constitution dictates that the debt has to be paid before any other financial obligation is met. So a default on this obligation will require a referendum on a constitutional amendment.
It looks as if García is prepared to pursue that if he must.
"There is no other option," he told The New York Times. "I would love to have an easier option. This is not politics; this is math."
On Wall Street, if you say you're defaulting, you might as well have defaulted.
And indeed the market is treating García's statements as fact. Bond insurers guaranteeing the island's debt are getting killed in the market. The stock of Assured Guaranty, which provides municipal-bond insurance and financial guarantees for infrastructure and structured financings, has fallen over 12%, while stock of the financial-services company MBIA has fallen over 17%.
In any case, the acknowledgement is probably a good thing for Puerto Rico. Once you admit you're going down, you can start negotiating as soon as possible.
"Puerto Rico executed the mother of all news dumps on Sunday night," Kelley said, adding "the market must decide whether or not this is the beginning of a larger breakdown of the global Prisoner's Dilemma.
"In this case the Prisoner's Dilemma is if they all keep their mouth shut, investors keep buying their debt. On the other hand, the first few to confess may be able to negotiate a deal."
Puerto Rico was considering taking on another $2.9 billion of debt before it commissioned an economic study that made García say "no more."
He told The Times that the commonwealth "could not continue to borrow money to address budget deficits while asking its residents, already struggling with high rates of poverty and crime, to shoulder most of the burden through tax increases and pension cuts."
Puerto Rico's creditors have to feel the pain as well, he said.
We'll see how much pain Wall Street is willing to take.
La degradación, el desmadre administrativo y el colapso del la isla si ocurrió en 2.5 años. Mediante la administración incompetente actual.
Constitucionalmente solo tienen que pagar no mas del 15% del presupuesto de 10 billones.
Eso es cerca de $1,500 millones.
Tienen en las manos anualmente.
-$9.5 billones que le sacan del bossillo a los puertorriqueños.
-$22 billones que envia el gobierno de EU.
Y no pueden pagar la deuda????
Utilizar el monto global de $72 billones como una excusa para ocultar su incompetencia y mediocridad es una burla y falta de respeto al pueblo.
BTW son $76 billones porque también el A Pandilla hizo dos emisiones antes de que le cerraran el mercado.
Por poca credibilidad, mentirle a los bonistas y al mercado.
Que diga ahora a viva voz...ME VALE!!!
Es un irresponsable.
Te empujaron cerca de 100 impuestos para pagar deuda.... donde está el dinero ahora que anuncio que la deuda es impagable???
Impagable?? Si solo son $1500 millones lo que le toca pagar.
A otro perro con esas pulgas.
No había salvado las finanzas en 18 meses????
No había llevado la deuda a 0 ????
Deberían residenciarlo por burlón, mediocre y embustero.
Viola la Constitución como gusto y gana le da.
Lástima que le crean las sandeces y se dejen meter el cuento mongo de $72 billones.
A este gobernador a todos los políticos deben arrestar por negligencia por no negociar hace 2 años desde principio. llevan insultando la banca los inversionistas las personas y los grupos que le dé dinero a puerto rico.
Dos años usando los inversionistas entregando documentos incorrectos informes reportes de contabilidad incorrecto a los inversionistas y eso es ilegal a todos lo tienen que acusar y arrestarlo federalmente a todo su equipo económico.