Sat | Dec 16, 2017

Puerto Rico bonds sink after bailout comment

Published:Friday | October 6, 2017 | 12:00 AM

President Donald Trump helped sink Puerto Rican bond prices with talk of wiping out the United States territory's debt, but his budget director dismissed the idea of a bailout Wednesday as the bankrupt island fights to recover from Hurricane Maria.

The federal government lacks the authority to simply do away with Puerto Rico's staggering US$74-billion debt, much of which is tied up in a court-supervised restructuring process after the territory sought a form of bankruptcy protection last year.

"It likely that there will be significant debt reduction in that process. It is not something that the president can make happen," said Brian Setser, a former top US Treasury Department official who worked on Puerto Rico's debt crisis.

The type of federal hurricane recovery aid that Puerto Rico receives could influence how the repayment process unfolds. However, no matter how the details shake out, creditors won't be paid anytime soon. Puerto Rico must first deal with hurricane clean-up and then try to plug a widening fiscal hole.

Puerto Rico's bonds, which have been falling since Hurricane Maria struck, took a sharp plunge Wednesday. One widely held benchmark general obligation bond was trading at 38 cents on the dollar, down from 46 cents a day earlier. Companies that insure billions of dollars of Puerto Rican debt also took a hit. Shares of MBIA, Assured Guaranty and Ambac Financial Group all tumbled on US markets.

Trump told Fox News on Tuesday that federal officials would have to look at Puerto Rico's debt structure and "we're going to have to wipe that out". It was a jarring comment from the president, who has repeatedly reminded Puerto Rico about its debts to Wall Street while the island struggles with a disaster that Governor Ricardo Rosello estimated could cost more than US$90 billion.

"If you are a bondholder, you are surprised and you are no doubt wondering what he has in mind," Setser said.

Budget Director Mick Mulvaney sought to clarify Trump's remarks Wednesday. He said the administration was sending Congress a disaster aid package that includes money for Puerto Rico to deal with "rebuilding, repair, debris removal, getting the electric grid up, getting the water back running and so forth.

"We are not going to be offering a bailout for Puerto Rico or for its current bondholders," he told reporters.

Mired in an economic recession for more than a decade, Puerto Rico borrowed heavily to cover budget shortfalls. Its bonds were attractive to investors across the US because they are exempt from federal or state income tax to residents of all 50 states.

Puerto Rico's debt crisis has not rattled the wider market for municipal bonds. As the crisis dragged on, most broad municipal bond mutual funds sold their Puerto Rican debt. It's now owned mostly by hedge funds, which bought the debt at a discount in hopes of making a profit. Still, about a fifth of Puerto Rico's debt is held by individuals who bought bonds long considered safe because they were constitutionally protected.

Setser said the territory is likely to need significant federal aid beyond the disaster aid package just for short-term budget help.

- AP