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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