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Puerto Rico Blues
Puerto Rico Narrowly Avoids Default—Sort of

Puerto Rico has narrowly avoided defaulting on its debt. Well, sort of. Reuters:

Puerto Rico avoided a default on debt maturing on Tuesday but warned that its deteriorating liquidity meant that future defaults loom.

There had been speculation that the U.S. territory would default on all or part of the $355 million notes issued by its financing arm, the Government Development Bank.

While Puerto Rico first defaulted in August, failure to make the payment on Tuesday would have been more significant because part of that debt was protected by the commonwealth’s constitution.

Yet while Puerto Rico managed to avoid defaulting on its most critical guarantees, it did default on other obligations:

Height Securities analyst Daniel Hanson said…Puerto Rico was defaulting on “instrumentality debt, not debt with a constitutional pledge.” General obligation bonds, along with GDB bonds that have constitutional guarantees, should be safe, he said, but bonds from entities such as highway authority PRHTA and infrastructure financing authority PRIFA are at risk.

In other words, Puerto Rico managed to avoid complete default because of the creativity of its politicians and bankers (“unsustainable financial gymnastics” as one Democratic Senator put it), not because it suddenly discovered some extra cash or figured out how to balance its spreadsheets. Over the weekend, we wrote that Puerto Rico needs “a policy mix that offers a real chance for recovery, both by forcing the necessary changes on what is clearly a failing approach to government, and in terms of creating conditions under which a refinanced and reformed jurisdiction can actually succeed. And we definitely need to be mindful of the precedents Puerto Rico ends up setting.” After today’s news, that’s as true as ever.

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  • Pete

    Puerto Rico must cut its public spending.

    Government spending is not an investment; it’s more a payoff to political constituencies groups like the unionized teachers and municipal employees.

  • Andrew Allison

    Could somebody explain why, given that default appears to be inevitable, PR bothered to make this payment?

    • f1b0nacc1

      They are trying to forestall the inevitable, in the hope that Barry O and his gang will bail them out. Once the default actually happens, there are enough legal complications that a bailout becomes far, far more complicated and difficult.
      As a side matter (I am sure) I would guess that numerous well-connected cronies will suffer major haircuts if a default actually occurs.

  • Dancquill

    So.. if Puerto Rico doesn’t stop “investing” in itself and start managing its money, it is toast. Governments sure love to use the I-word a lot when they want to put one over on the taxpayers.

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