Here It Comes: Puerto Rico Is Headed for a Debt Default

Slate MoneyBox, By Jordan Weissmann, July 31

So it looks like Puerto Rico has some fun weekend plans. After months of staggering under its $72 billion debt load, the island is expected to miss a bond payment due Saturday, which—despite what some government officials have claimed—means the island is probably heading for default. (We won’t know for sure whether it happens until Monday, according to Reuters, since the cash isn’t due until the next business day).

Think of this as a gentle warmup for a much bigger confrontation over Puerto Rico’s debt that’s still to come. The government is set to skip a relatively small $58 million payment on a set of bonds largely owned by Puerto Rican credit union members, who—unlike the many hedge funds among the island’s creditors—aren’t especially likely to sue for their money. Even if they did, not much would come of it, since the debts in question are “moral obligation” bonds—so-called because issuers only have a moral (ha), but not legal, obligation to pay them back.

Still, as Bloomberg puts it, this is basically Puerto Rico’s “warning shot to investors that officials aren’t afraid to default.” The island says it simply doesn’t have the cash flow to cover its obligations (which may well be true), and is working on a debt-restructuring plan it should have done by Sept. 1. But by skipping this weekend’s payment, it’s signaling to creditors that they should really consider making a deal or risk getting stiffed. Whether the act of defaulting on a group of credit-union members who lack much in the way of legal recourse will intimidate some steely hedge funders remains to be seen.

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