Puerto Rico moves one step closer to default
Judge Threatens Plan for Puerto Rico to Avert Financial Catastrophe
Judge Francisco A. Besosa of the US District Court in San Juan has struck down Puerto rico’s “Recovery Act” which effectively allowed Puerto Rico to go through a bankruptcy like process.
Puerto Rico (PR) has been in financial trouble for a while and this is a very interesting next step in their saga. While the Judge’s ruling is probably the correct one and will hold up to the inevitable appeal, it certainly does harm PR’s negotiating position with its creditors.
Now, that is not necessarily a “bad” thing. Investors buy government issued bonds because of their security and bankruptcy remote nature. In PR’s case, they (like other States in the US) can’t declare bankruptcy and investors have bought their notes predicated upon that security. To change the game now is extremely dangerous and sets a horrible precedent for future bond issuances.
In fact, you can see the results of the news in the financial markets reaction and the yields on PR’s debt. Yields on PR’s debt have now risen above those of Greece, indicating that PR is a greater default risk that Greece – go figure. Much like the EU will find a way to help Greece out of its issues, the US will eventually step in and provide PR with a bailout package of some sort. It is highly unlikely that Washington would just allow PR to default. There will be some pain along the way (for PR and it investors), but I am confident they’ll come to a resolution that doesn’t involve PR defaulting on its debt.