Puerto Rico reaches debt restructuring deal

By NEOnline | IR

People chant slogans and carry signs during a protest near the offices of hedge fund manager John Paulson, in New York, New York, USA, 13 August 2015. Protestors expressed their displeasure at Paulson's recent investments in Puerto Rico, which is facing major economic turmoil, because his and other investors' debt purchases are being made at pennies on the dollar with the hope of profiting on any future financial settlements.

People chant slogans and carry signs during a protest near the offices of hedge fund manager John Paulson, in New York, New York, USA, 13 August 2015. Protestors expressed their displeasure at Paulson’s recent investments in Puerto Rico, which is facing major economic turmoil, because his and other investors’ debt purchases are being made at pennies on the dollar with the hope of profiting on any future financial settlements.

Puerto Rico reached an agreement on Christmas eve with major insurance companies and bondholders to restructure its $8.2 bn of debt (€7,4 bn) in what markets consider the first step towards a resolution of the island’s fiscal crisis. Puerto Rico has been likened to Greece. With a population of 3.5 million the island owes $70 bn (€64 bn), comparable only to California and New York.

Prepa, the island’s public electric power utility, holds 70% of the island’s public debt. The creditors are accepting a 15% haircut (approximately $600 million), via a securities exchange. The agreement should unleash liquidity to invest in run down infrastructure, making the servicing of the debt more sustainable. Insurance companies will provide a cushioning – “surety” bond – for the event of a default.

Perhaps more significantly, the deal is seen as a pilot for the restructuring of the municipal-bond market across the United States and the “less-than-sovereign” debt of the island, which is part of the US Commonwealth, but not quite a State or independent. The island’s Rovernor, Garcia Padilla, failed in attempt to persuade the Congress to allow the island’s agencies to file for bankruptcy protection, forcing Prepa to negotiate with bondholders.

As Europe was bracing in agony for a possible Grexit in July 2015, Wolfgang Schaeuble, Germany’s Finance Minister, turned financial attention towards Puerto Ricco. At the time (July 8th), during an international event in Frankfurt, Mr. Schaeuble said, “I offered my friend [US Treasury Secretary] Jack Lew these days that we could take Puerto Rico into the euro zone if the U.S. were willing to take Greece into the dollar union. He thought that was a joke.”

The substance of this statement may be interpreted as saying that Greece was to Germany what Puerto Rico is to the United States and its Commonwealth territories. Puerto Rico provided a rare example of an over indebted sovereign that could not afford to devalue its currency and had to consider a haircut. As with Greece, Puerto Rico defaulted on domestic bondholders alone and has been restructuring its debt through painful negotiations. The island is in recession and there is mass immigration.

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