In Puerto Rico’s Debt Crisis, Shades of Argentina

Hedge funds are using similar tactics they wielded to score a big payday from the South American country this year


MI-CP504_PUERTO_J_20160504185222WASHINGTON—Puerto Rico’s economic trouble has prompted comparisons to Greece, but a better analogy might be Argentina.

Hedge funds that bought billions of dollars of Puerto Rico’s debt two years ago are resisting a broader restructuring in hopes of preserving their rights to be paid off first and in full.

The playbook—as well as some of the parties and circumstances—are similar to those that helped a group of holdout bondholders score a big payday in Argentina. In that case, hedge funds used the courts to secure better terms than the government had offered, agreeing in February with Argentina’s newly elected government to end the standoff after 15 years.

This time around, the debate is whether the U.S. Congress should pass legislation that would give a federal oversight board the power to help the island balance its budget while authorizing a court-supervised restructuring of its $72 billion in debt. On Tuesday, Treasury Secretary Jacob Lew touted the risk of a long battle with hedge funds as a reason to move quickly on a restructuring.

“As we saw in Argentina, holdouts can drive a process to the brink,” he said. “Puerto Rico doesn’t have 15 years. If this goes into litigation…there won’t be anything left of Puerto Rico.”

Conditions are worsening on the island, which has been mired in a recession since 2006. Puerto Rico’s Government Development Bank missed most of a $422 million payment on Monday.

Because it is a U.S. territory, it can’t file for bankruptcy, an option for municipalities and state agencies, and it can’t turn to institutions like the International Monetary Fund for help, because it isn’t a country. Its residents are U.S. citizens and have been leaving in droves for the mainland, with tens of thousands departing annually since 2010.


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