White House walks back Trump’s Puerto Rico comments as Wall Street reels
NEW YORK — On Tuesday night, President Donald Trump casually told Geraldo Rivera on Fox News that the United States would have to wipe out $75 billion in debt owed by Puerto Rico to bondholders around the world.
Wall Street promptly freaked out, sending Puerto Rican bonds into a tailspin and leading the White House to move swiftly to clean up Trump’s seemingly offhand remarks.
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On Wednesday, the Trump administration indicated it has no current plans to take the unprecedented, politically dangerous and probably illegal step of wiping out the owners of Puerto Rico’s bonds in the wake of Hurricane Maria’s devastation. Trump’s own budget chief quickly walked the president’s comments back.
“I wouldn’t take it word for word with that,” OMB Director Mick Mulvaney said on CNN. “We are not going to deal right now with those fundamental difficulties that Puerto Rico had before the storm.”
Added Mulvaney: “Puerto Rico’s going to have to figure out how to fix the errors that it’s made for the last generation on its own finances.”
Numerous senior administration officials and a White House spokesman did not respond to requests on Wednesday morning for further comment on Trump’s remarks.
Mulvaney was cleaning up after a remarkable Trump interview that sent Wall Street bond traders and holders of Puerto Rico’s debt scrambling overnight Tuesday. The island’s general obligation bonds dropped from 56 cents on the dollar to just 36 cents early on Wednesday as investors tried to figure out exactly what the White House might actually do.
The chaos on Wall Street came after Trump told Fox of Puerto Rico: “They owe a lot of money to your friends on Wall Street and we’re going to have to wipe that out. You can say goodbye to that.”
Seemingly in populist, bash-Wall-Street mode, Trump singled out Goldman Sachs, which has produced many of the administration’s top economic officials, as a big holder of Puerto Rican debt. “I don’t know if it’s Goldman Sachs, but whoever it is, you can wave goodbye to that.”
Goldman officials said on Wednesday that the bank does hold Puerto Rican debt, but it is mostly in client accounts. Other big bond mutual fund holders of the island’s debt include OppenheimerFunds, Franklin Templeton, BlackRock and T. Rowe Price. This means that a good portion of the debt is held in mutual funds for average investors. The debt is cheap, yields around 8 percent and is exempt from local, state and federal taxes, making it an attractive target for investment funds.
Trump’s comments aside, there is already a process in place for dealing with Puerto Rico’s crushing debt burden.
Congress passed a law last year to grant the commonwealth what essentially amounts to a super-bankruptcy, in an effort to allow Puerto Rico to begin its recovery from that debt, which includes over $50 billion in unfunded pension liabilities to workers in addition to the more than $70 billion owed to bondholders.
The law was subject to attack ads accusing Republicans who drafted it of a “bailout” of the commonwealth, though no money went toward Puerto Rico’s debt.
The president has no direct power over the territory’s debt, though he can fire members of the unpopular federal board that was set up to oversee the island’s finances and nominate others.
But that could throw into turmoil the work that’s being done by the board and the commonwealth government toward reforming Puerto Rico’s finances.