Puerto Rico’s Debt Wiped out? Not so Fast (Updated)

Puerto Rico’s Debt Wiped out? Not so Fast (Updated)

President Donald Trump’s comments Tuesday about Puerto Rico’s $72-billion debt being “wiped out” sent bond markets into a tizzy Wednesday, and, in the process, got the issue of the hurricane-ravaged island’s finances back into the discussion as it rebuilds.  (And reminded us former business journalists that psychology still drives market shifts, and bond markets are a jittery lot.)

The comments came during the President and First Lady’s tour of Puerto Rico Tuesday as the island slogs its way back to a sense of normalcy, one day at a time.

In an interview with Fox News Tuesday night, the president said:

“They owe a lot of money to your friends on Wall Street and we’re going to have to wipe that out. You’re going to say goodbye to that, I don’t know if it’s Goldman Sachs but whoever it is you can wave goodbye to that,” Trump said.

“The island’s general obligation bonds, which yield 8 percent, dropped to just 37 cents on the dollar,” during trading Wednesday, according to CNBC. “Just last month, the bonds were trading at around 56 cents to the dollar.”

But by the end of the day, the markets had settled down after the director of the Office of Management and Budget (OMB), Mick Mulvaney, had clarified the president’s comments.

“I think what you heard the president say is that Puerto Rico is going to have to figure out a way to solve its debt problem,” Mulvaney told NPR.

“Puerto Rico and its agencies owe more than $70 billion to creditors,” the WSJ reported Wednesday. “In May, Puerto Rico was placed under court protection in what amounted to the largest-ever U.S. municipal bankruptcy. A federal judge is presiding over the island’s debt restructuring under a bankruptcy-like legal framework approved by Congress last year, known as Promesa.

“Congress has appointed a federal oversight board to represent the island’s government. With the dispute now being heard in federal court, it’s not clear Trump would have the authority to intervene in the dispute, even if he wanted to.”

The President – FEMA, DHS and many cabinets of the executive branch – are facing unprecedented logistical challenges with Puerto Rico following three major hurricanes that damaged southeast Texas, Louisiana and Florida and the U.S. Virgin Islands before Maria hit Puerto Rico, which was already struggling to recover from Irma when Maria made landfall.

Now, the Trump Administration is reportedly preparing another appropriations request to shore up its emergency reserves to meet these and other challenges.

The AP Reports that “the Trump administration is finalizing a $29 billion disaster aid package that combines $16 billion to shore up the government-backed flood insurance program with almost $13 billion in new relief for hurricane victims, according to a senior administration official and top congressional aides.

“The request would address two pressing needs. The first is to pump money into the government-run flood insurance program, which is rapidly running out of cash to pay an influx of claims from victims of hurricanes Harvey, Irma, and Maria. At the same time, the Federal Emergency Management Agency continues to spend money for disaster relief operations at a high rate and requires more money.”

So while Puerto Rico struggles to rebuild, the U.S. government is running through its cash for emergencies at an alarming rate.  Puerto Rico’s long-term cost of rebuilding will remain an issue over how much the U.S. should contribute to the federal/local formula.

Right now, the federal government is fronting the cost 100 percent, which is only right and necessary, given the scale of the destruction that Puerto Rico faces.  The island and all the agencies are making progress getting its infrastructure back online and it’s heartening to see the spirit of the Puerto Rico rising to meet these challenges. The costs of getting it done, how much the U.S. should spend over the long-haul, and how Puerto Rico restructures its debt, are still moving targets.