Puerto Rico Bonds Plunge After Trump Suggests Debt May Need to Be Wiped Out
“We are going to work something out. We have to look at their whole debt structure,” Trump said in a Fox News interview Tuesday. “You know they owe a lot of money to your friends on Wall Street. We’re gonna have to wipe that out. That’s gonna have to be — you know, you can say goodbye to that. I don’t know if it’s Goldman Sachs but whoever it is, you can wave goodbye to that.”
Puerto Rico is dealing with an immediate humanitarian disaster made worse by the long-term debt crisis that led it to declare a form of bankruptcy this year. The commonwealth’s government for decades had been plagued by budget deficits caused by wasteful spending, and borrowed $74 billion. Much of that went to operations.
Trump surveyed the damage Tuesday afternoon during a visit to the island, where he met local officials and offered consolation to residents who’ve been without power and short of drinking water since the storm struck on Sept. 20. An estimated 34 people were killed by the hurricane and about 93 percent of homes there still lacked electricity as of Tuesday.
The White House and Puerto Rico Governor Ricardo Rossello didn’t immediately respond to emails and messages Tuesday night seeking a response to Trump’s comments on the island’s debt. Other officials in Puerto Rico said that time would tell what the president meant by his remarks about the island’s debt load.
“We have to wait and see the extent of the comments and what that means for the debt in Puerto Rico,” said Alfonso Orona, the governor’s chief legal counsel, in an interview in San Juan on Wednesday. “We have to wait and see what he meant by that and how it’s going to translate into some type of legislation, some type of executive action. So we don’t know yet.”
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Moody’s Analytics estimated that the island sustained $95 billion in hurricane-related damage. With little financial ability to recover from the storm on its own, the island’s government will rely heavily on aid from Washington to get back on its feet.
The White House is crafting a $29 billion disaster-aid package it intends to send to Congress that would include $16 billion to shore up the federal flood insurance program and $13 billion in additional relief covering the entire hurricane and wildfire season, including major storms that hit Texas, Louisiana and Florida as well as Puerto Rico, according to a Republican lawmaker.
At a briefing with local officials in an airport hangar, Trump complained — perhaps as a joke — about the expense of the federal response to the storm. “I hate to tell you, Puerto Rico, but you’ve thrown our budget a little out of whack — because we’ve spent a lot of money on Puerto Rico and that’s fine, we’ve saved a lot of lives,” Trump said.
Puerto Rico began defaulting on its debts two years ago, seeking to avoid Draconian budget cuts officials said would deal another blow to an already shrinking economy. With nearly half of its 3.4 million residents living in poverty, the government sought protection from creditors in May.
With a population the size of Connecticut’s and an economy smaller than Nebraska’s, Puerto Rico has more debt than any U.S. state government except California, New York and Massachusetts. The debt, a result of generations of mismanagement, was enabled by Wall Street, which was enticed by the fact it was tax free everywhere in the U.S. and risky enough to provide rich yields.
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It is not clear how Puerto Rico’s debt could just be made to disappear outside of bankruptcy court. Still, to “wipe out” $74 billion in municipal debt, billions of which are guaranteed by the island’s constitution, would shake investor faith in a market long considered one of the safest of havens. Lower rated municipal borrowers would almost certainly see their borrowing costs rise to account for the added risk.