Puerto Rico Governor Says Island’s Debts Are ‘Not Payable’

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Puerto Rico Governor Says Island’s Debts Are ‘Not Payable’

Post by Northern Flicker »

[Thread merged into here, see below. --admin LadyGeek]

http://mobile.nytimes.com/2015/06/29/bu ... &referrer=
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Re: Greece or Puerto Rico?

Post by z3r0c00l »

It seems unlikely that any nation could ever recover from debt of many years of GDP. They can perhaps kick it down the road for a long time, decades, but in the long run... Maybe with sudden and intense inflation?

In any event, the big difference here is the fact that PR can always be covered by the rest of us. The political question of why a distant island like PR should be a territory in the first place is probably more of an issue. The crime and economic conditions there are way sub-par compared to the CONUS.
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Re: Greece or Puerto Rico?

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Re: Greece or Puerto Rico?

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LadyGeek wrote:Thread locked for moderator review.
After review, this thread will remain locked. Non-actionable.
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Puerto Rico Governor Says Island’s Debts Are ‘Not Payable’

Post by bobcat2 »

[Thread merged into here, see below. --admin LadyGeek]
The governor of Puerto Rico has decided that the island cannot pay back more than $70 billion in debt, setting up an unprecedented financial crisis that could rock the municipal bond market and lead to higher borrowing costs for governments across the United States.

Puerto Rico’s move could roil financial markets already dealing with the turmoil of the renewed debt crisis in Greece. It also raises questions about the once-staid municipal bond market, which states and cities count on to pay upfront costs for public improvements such as roads, parks and hospitals.
Link to WaPo article
http://www.washingtonpost.com/business/ ... ml?hpid=z2

Link to NYTimes article
http://www.nytimes.com/2015/06/29/busin ... .html?_r=0

Link to NPR article
http://www.npr.org/sections/thetwo-way/ ... eport-says

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Re: Puerto Rico Governor Says Island’s Debts Are ‘Not Payable’

Post by Wayson »

What I can't fathom is how Puerto Rico's debt managed to get that big in the first place. They have what, 3.6 million people total? They never, ever should have been allowed to borrow that much.
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Re: Puerto Rico Governor Says Island’s Debts Are ‘Not Payable’

Post by clast »

To keep it on-topic, does anyone know which vanguard bond funds hold Puerto Rico bonds, or are otherwise affected?
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Re: Puerto Rico Governor Says Island’s Debts Are ‘Not Payable’

Post by Pacific »

"A U.S. commonwealth with a population of 3.6 million, Puerto Rico carries more debt per capita than any state in the country. The island has been staggering under the increasing weight of those obligations for years as its economy has tanked, triggering an exodus of island residents to the mainland not seen since the 1950s."

That's $20,000 per person. I think a lot of state have higher debt per capita.
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Re: Puerto Rico Governor Says Island’s Debts Are ‘Not Payable’

Post by in_reality »

clast wrote:To keep it on-topic, does anyone know which vanguard bond funds hold Puerto Rico bonds, or are otherwise affected?
Vanguard High-Yield Tax-Exempt (VWAHX or VWALX) seem to have 0.3% of it's top 100 (out of 1000) in Puerto Rico.

By comparison, the fund I use (HYD) has 0.39% out of it's top 100 (out of about 1000) and roughly 2.71% overall.
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Re: Puerto Rico Governor Says Island’s Debts Are ‘Not Payable’

Post by SimpleGift »

clast wrote:To keep it on-topic, does anyone know which vanguard bond funds hold Puerto Rico bonds, or are otherwise affected?
None of the Vanguard muni funds appears to hold a significant percentage of Puerto Rico bonds (table below) — but it's very likely the entire municipal bond market will get the jitters for a while until this debt crisis is resolved.
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Re: Puerto Rico Governor Says Island’s Debts Are ‘Not Payable’

Post by Index Fan »

This is actionalbe? ;)


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Re: Puerto Rico Governor Says Island’s Debts Are ‘Not Payable’

Post by celia »

Index Fan wrote:This is actionalbe? ;).
The action might be to get out of any investments that hold PR bonds. That is what the discussion is currently about. ;)
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Re: Puerto Rico Governor Says Island’s Debts Are ‘Not Payable’

Post by dolphinsaremammals »

In view of some other thread wondering if states can declare bankruptcy, I was interested to read in the Times article a remark that Puerto Rico can't declare bankruptcy "because it's a commonwealth." Why is a commonwealth special? Does this mean U.S. states that are commonwealths, like Massachusetts can't declare bankruptcy?
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Re: Puerto Rico Governor Says Island’s Debts Are ‘Not Payable’

Post by kenner »

"Commonwealth" is a nomenclature used by four of the constituent states of the United States of America in their official, full state names. These states are Kentucky,[1] Massachusetts,[2] Pennsylvania,[3] and Virginia. The four are among the first 15 states to join the Union.

This designation has no legal meaning ...

Also see http://www.csg.org/pubs/capitolideas/en ... e65_3.aspx
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Re: Puerto Rico Governor Says Island’s Debts Are ‘Not Payable’

Post by JoMoney »

dolphinsaremammals wrote:In view of some other thread wondering if states can declare bankruptcy, I was interested to read in the Times article a remark that Puerto Rico can't declare bankruptcy "because it's a commonwealth." Why is a commonwealth special? Does this mean U.S. states that are commonwealths, like Massachusetts can't declare bankruptcy?
State's can't declare bankruptcy
http://www.csg.org/pubs/capitolideas/en ... e65_3.aspx
...The contracts clause of the U.S. Constitution prohibits state governments from ‘impairing the obligation of contracts.’ As originally understood and enforced, this clause prohibited state legislatures from passing any laws to relieve either private debt or the state government's own debt. Beginning in 1934, however, the Supreme Court began to interpret the contracts clause more flexibly and not as an absolute bar to state debt relief laws. Even under the flexible modern approach, however, the Supreme Court in 1977 reiterated that ‘a state cannot refuse to meet its legitimate financial obligations simply because it would prefer to spend the money (on something else.)’ Thus, were Congress to amend the federal bankruptcy code to authorize states to repudiate debt, the Supreme Court would then need to decide the novel constitutional question of whether such debt repudiation would nonetheless violate the contracts clause of Article I, Section 10.”
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Re: Puerto Rico Governor Says Island’s Debts Are ‘Not Payable’

Post by Valuethinker »

Puerto Rico events have long been discounted by the market-- it was rated junk.

Hence the zero holdings by most VG funds, which only hold investment grade. I suspect most of the bonds will be held by vulture funds, who will be looking to use legal action to improve the terms of the debt writeoff.

We have had, here, people whose 'financial advisers' have put them into PR bonds for income. A nightmare, and why you should be careful of so-called advisers (if they were doctors, we'd have had them disbarred for malpractice).

The old lesson: don't chase yield.

Let's say that again: don't chase yield.

If you want to worry, think about Illinois. *that* would be a fiscal catastrophe.
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Re: Puerto Rico Governor Says Island’s Debts Are ‘Not Payable’

Post by Valuethinker »

kenner wrote:"Commonwealth" is a nomenclature used by four of the constituent states of the United States of America in their official, full state names. These states are Kentucky,[1] Massachusetts,[2] Pennsylvania,[3] and Virginia. The four are among the first 15 states to join the Union.

This designation has no legal meaning ...

Also see http://www.csg.org/pubs/capitolideas/en ... e65_3.aspx
But PR is a dependent territory? Might that have some legal implication?
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Re: Puerto Rico Governor Says Island’s Debts Are ‘Not Payable’

Post by Valuethinker »

Pacific wrote:"A U.S. commonwealth with a population of 3.6 million, Puerto Rico carries more debt per capita than any state in the country. The island has been staggering under the increasing weight of those obligations for years as its economy has tanked, triggering an exodus of island residents to the mainland not seen since the 1950s."

That's $20,000 per person. I think a lot of state have higher debt per capita.
Yes it sounds like the reporters got their numbers mixed up. What I suspect PR has is a higher debt/ GDP than any other state in the Union.
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Re: Puerto Rico Governor Says Island’s Debts Are ‘Not Payable’

Post by Valuethinker »

Wayson wrote:What I can't fathom is how Puerto Rico's debt managed to get that big in the first place. They have what, 3.6 million people total? They never, ever should have been allowed to borrow that much.
A warning about financial markets. They invested on the basis of an 'implicit guarantee' that the US Federal government would not let a dependent territory go broke. At some point, the realization is made that maybe the implicit guarantee is only implicit.

Financial markets can be terribly short termist.
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Re: Puerto Rico Governor Says Island’s Debts Are ‘Not Payable’

Post by Levett »

This is what Vanguard said a little over a year ago.

https://personal.vanguard.com/us/insigh ... /2952-Exc5

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Re: Puerto Rico Governor Says Island’s Debts Are ‘Not Payable’

Post by Longdog »

Much of the Puerto Rico debt is insured, so if Puerto Rico misses or decreases payments on those bonds, the insurers will step in and make the payments. These same insurers have been engaged in significant negotiations with various Puerto Rico entities for about a year.

Puerto Rico can't declare bankruptcy for the sole reason that it is explicitly prevented from doing so by law. Also, unlike states, Puerto Rico debt is not taxable by ANY state, locality, or the Federal government. This has greatly expanded the market for Puerto Rico debt, and gave them more favorable borrowing terms than they would otherwise have.
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Re: Puerto Rico Governor Says Island’s Debts Are ‘Not Payable’

Post by Flashes1 »

[OT comments removed by admin LadyGeek]
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Re: Puerto Rico Governor Says Island’s Debts Are ‘Not Payable’

Post by Grt2bOutdoors »

Valuethinker wrote:Puerto Rico events have long been discounted by the market-- it was rated junk.

Hence the zero holdings by most VG funds, which only hold investment grade. I suspect most of the bonds will be held by vulture funds, who will be looking to use legal action to improve the terms of the debt writeoff.

We have had, here, people whose 'financial advisers' have put them into PR bonds for income. A nightmare, and why you should be careful of so-called advisers (if they were doctors, we'd have had them disbarred for malpractice).

The old lesson: don't chase yield.

Let's say that again: don't chase yield.

If you want to worry, think about Illinois. *that* would be a fiscal catastrophe.
+1 Exactly, the pigs deserve to get slaughtered. More money has been lost chasing yield than at the point of a gun. :twisted:
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Re: Puerto Rico Governor Says Island’s Debts Are ‘Not Payable’

Post by Grt2bOutdoors »

SteveM wrote:Much of the Puerto Rico debt is insured, so if Puerto Rico misses or decreases payments on those bonds, the insurers will step in and make the payments. These same insurers have been engaged in significant negotiations with various Puerto Rico entities for about a year.

Puerto Rico can't declare bankruptcy for the sole reason that it is explicitly prevented from doing so by law. Also, unlike states, Puerto Rico debt is not taxable by ANY state, locality, or the Federal government. This has greatly expanded the market for Puerto Rico debt, and gave them more favorable borrowing terms than they would otherwise have.
Ah, yes, the bond insurers, the same ones like MBIA and Ambac that nearly went "poof" "up in smoke" nearly 7 years ago? That term
"municipal insurance" is a joke, the insurance is only as good as the financial paying ability of the guarantor. Let's expand on this - if a substantial chunk of the insured marketplace were to become unable to meet their obligations, do you really believe that one or two companies have enough in reserves to meet those obligations? I have a bridge I'd like to sell you.
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To heck with Greece -- what about Puerto Rico?

Post by Browser »

[Thread merged into here, see below. --admin LadyGeek]
Puerto Rico’s governor, saying he needs to pull the island out of a “death spiral,” has concluded that the commonwealth cannot pay its roughly $72 billion in debts, an admission that will probably have wide-reaching financial repercussions.
Is Illinois next?

http://www.nytimes.com/2015/06/29/busin ... .html?_r=0
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Re: Puerto Rico Governor Says Island’s Debts Are ‘Not Payable’

Post by Valuethinker »

Flashes1 wrote:The Governor of California will someday say the same thing.
California is running a financial surplus I believe?

I agree CA has particular politico-economic issues (narrowness of tax base, irrational property taxation, government by voter proposition) which give it instability. On the other hand it has good demographics, and one of the most dynamic economies in the USA (if not the developed world). The tech sector has been written off before, and bounced back (conversely it's had bubbles before).

The drought is perhaps more of a long term threat, although again perhaps largely due to an established base of interests (agriculture). But the drought calls into question the viability of habitation in large parts of CA (or at least the continuation of current ways of living).
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Re: To heck with Greece -- what about Puerto Rico?

Post by reason-logic »

As an investor with a sizable muni bond portfolio, my primary concern is whether politics will trump current laws in place. Puerto Rico's constitution requires that bond payments be made before any other expenditure, so will the commonweath's government and legal system protect bond holders as promised or will they disregard their own laws now that it is inconvenient?They could privatize their utilities etc. but that would mean eliminating the inefficiencies inhearent in the current structure. Same situation with Illinois and New Jersey. What concerns me is the courts or legislatures retroactively eliminating the protections in place when the bonds were issued.
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Re: Puerto Rico Governor Says Island’s Debts Are ‘Not Payable’

Post by kenner »

Valuethinker wrote:
kenner wrote:"Commonwealth" is a nomenclature used by four of the constituent states of the United States of America in their official, full state names. These states are Kentucky,[1] Massachusetts,[2] Pennsylvania,[3] and Virginia. The four are among the first 15 states to join the Union.

This designation has no legal meaning ...

Also see http://www.csg.org/pubs/capitolideas/en ... e65_3.aspx
But PR is a dependent territory? Might that have some legal implication?
A Wall Street Journal article says Puerto Rico cannot declare bankruptcy (re-organize debt), but I cannot find a way to post the link. Perhaps other posters can link this.

I imagine Puerto Rico could just stop paying debts and deal with the consequences. Not pretty.
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Re: Puerto Rico Governor Says Island’s Debts Are ‘Not Payable’

Post by larryswedroe »

Just because a bond fund owns PR bonds does not mean that they will suffer losses, they could own bonds that have been PRE REFINANCED, meaning they are backed by safe bonds, typically Treasuries
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Re: Puerto Rico Governor Says Island’s Debts Are ‘Not Payable’

Post by cfs »

Puerto Rico and California.

-- Boriken or Borinquen (Taino name for Puerto Rico), situation normal. The island was broke when I was stationed there in the early 1980s and nothing changed after I left--and kicking the US Navy out of the island did not help the local economy. The current governor will continue to borrow, then pass the buck to the next governor (same game played for decades).

-- California, governor Brown is bragging about a small surplus (thanks to Miss Tax Payer), and oh by the way, my California bond funds are doing fine (at least for now).

Sigamos (yes, sigamos is exactly what the governor of Puerto Rico is saying about his borrowing tactics, no reason to stop or change so sigamos).
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Re: Puerto Rico Governor Says Island’s Debts Are ‘Not Payable’

Post by Latestarter »

From Vanguard's latest semiannual report on its muni funds, issued in the spring:
"We had no direct Puerto Rico credit exposure in the investment-grade funds because our minimal holdings are either insured or pre-refunded. The HighYield Fund does have direct exposure."
Apparently if bonds are insured, that's regarded as equivalent to having "no direct...exposure."
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Re: Puerto Rico Governor Says Island’s Debts Are ‘Not Payable’

Post by White Coat Investor »

Valuethinker wrote: We have had, here, people whose 'financial advisers' have put them into PR bonds for income. A nightmare, and why you should be careful of so-called advisers (if they were doctors, we'd have had them disbarred for malpractice).
You disbar attorneys. You just take doctors' money.
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Re: Puerto Rico Governor Says Island’s Debts Are ‘Not Payable’

Post by amphora »

I find it unlikely Puerto Rico will default on its debt. The Federal government could bail out Puerto Rico in exchange for some reforms or a new tax.

I actually think this is a buying opportunity, albeit a slightly risky one.
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Re: Puerto Rico Governor Says Island’s Debts Are ‘Not Payable’

Post by Geologist »

According to the October 31, 2014 Statement of Net Assets (I don't have the April 30, 2015 to hand yet):

The Intermediate Tax-Exempt Fund owned mostly Puerto Rico Electric Power Authority Revenue bonds, insured by the National Public Finance Guarantee Corp (NPFG), and one pre-refunded P.R. Sales Tax Financing Corp Revenue Bond. The NPFG is one of the insurance companies that appeared after the 2008 recession, so it is presumably solvent and able to back its insurance.

The Long-Term Tax-Exempt Fund has some uninsured P.R. bonds (including some zero coupon bonds) as well as insured bonds from various entities.

In any case, as pointed out earlier, the total proportion of net assets in P.R. bonds in Vanguard muni funds is small.

At least this morning, while Puerto Rico bonds fell in the market, the broader muni market rallied (correlated with Treasuries).
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Re: Puerto Rico Governor Says Island’s Debts Are ‘Not Payable’

Post by celia »

EmergDoc wrote:
Valuethinker wrote: We have had, here, people whose 'financial advisers' have put them into PR bonds for income. A nightmare, and why you should be careful of so-called advisers (if they were doctors, we'd have had them disbarred for malpractice).
You disbar attorneys. You just take doctors' money.
The state can disbar attorneys and they can take away the medical license of doctors.
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Re: Puerto Rico Governor Says Island’s Debts Are ‘Not Payable’

Post by nirm »

amphora wrote:I find it unlikely Puerto Rico will default on its debt. The Federal government could bail out Puerto Rico in exchange for some reforms or a new tax.

I actually think this is a buying opportunity, albeit a slightly risky one.
So the White House and D.C. are contemplating changing the law to allow for bankruptcy instead of offering bailout:

http://finance.yahoo.com/news/white-hou ... 16211.html

Good Luck!
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Re: Puerto Rico Governor Says Island’s Debts Are ‘Not Payable’

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Re: Puerto Rico Governor Says Island’s Debts Are ‘Not Payable’

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I merged jalbert's, bobcat's, and browser's threads into here. This thread will remain locked. Please do not start another discussion on this topic.

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