This exploded last night. As many of you know I live in PR and have been very critical of the situation even though I've tried to put my effort into trying to revive the shitty economy. the time of reckoning has come though, and Puerto Rico has admitted they will default (quite probably) their $72b debt. This is basically US's Greece at this point, although the effect won't be as big in the US as Greece's is on EU. GAF has investors, so this will affect them if they have municipal bonds.
Source: http://www.businessinsider.com/puerto-rico-now-belongs-to-wall-street-2015-6#ixzz3eTOkCxs4The governor of Puerto Rico has admitted that the country can't keep paying down its over $72 billion worth of public-debt obligations.
As a result, the country finds itself in a uniquely awful position.
It can't enter bankruptcy, according to its own laws, so now it has to deal exclusively with its creditors to restructure its debt.
That means it has to deal with Wall Street.
"I think the surprise was that it happened this quickly," said Brian Kelly, CEO of the Connecticut-based fund Brian Kelly Capital. "We thought it would take six months to a year ... the solution is a debt restructuring."
Of course, when you restructure an economy that is already in tatters, its ability to pay is reduced as it struggles to fulfill its obligations. It can be a vicious cycle.
And once you're in the cycle, Kelly said, "the question is: 'Is this the first domino to fall?'"
Here's the situation: Puerto Rico's economy is in recession with a 14% unemployment rate. With little money coming in, legislators were already debating major cuts to the country's $10 billion budget.
"My administration is doing everything not to default," Gov. Alejandro García Padilla said. "But we have to make the economy grow," he added. "If not, we will be in a death spiral."
But growing out of this is not an option.
For months, even as distressed debt buyers started circling, Wall Street remained optimistic that things would work out.
jeffrey gundlachREUTERS/Brendan McDermidJeffrey Gundlach has previously said Puerto Rico bonds look like a good opportunity for investors looking for risk.
Earlier this month, bond god Jeff Gundlach of DoubleLine Capital told investors that he thought Puerto Rico would "make it to the goal line," adding that they would, at worst, restructure around 80 cents on the dollar.
That's not looking close to possible now, Kelly said.
A lot of Puerto Rico's debt is in municipal bonds, and thus the country's situation is similar to Detroit's.
But unlike Detroit, Puerto Rico a US territory doesn't have the option of using the bankruptcy process to discharge its debt.
Consequently, it will be forced to negotiate with its creditors, making it a little bit more like Greece.
Those negotiations could involve a lengthy slog such as the one we're seeing in Greece in which Puerto Rico must constantly go back to the table to restructure with its creditors. It will not be able to access international markets in the state it's in.
Puerto Rico's constitution dictates that the debt has to be paid before any other financial obligation is met. So a default on this obligation will require a referendum on a constitutional amendment.
It looks as if García is prepared to pursue that if he must.
"There is no other option," he told The New York Times. "I would love to have an easier option. This is not politics; this is math."
On Wall Street, if you say you're defaulting, you might as well have defaulted.
And indeed the market is treating García's statements as fact. Bond insurers guaranteeing the island's debt are getting killed in the market. The stock of Assured Guaranty, which provides municipal-bond insurance and financial guarantees for infrastructure and structured financings, has fallen over 12%, while stock of the financial-services company MBIA has fallen over 17%.
Puerto Rico's Governor Alejandro Garcia Padilla REUTERS/Alvin BaezPuerto Rican Gov. Alejandro García Padilla delivering his state of the Commonwealth address in San Juan.
In any case, the acknowledgement is probably a good thing for Puerto Rico. Once you admit you're going down, you can start negotiating as soon as possible.
"Puerto Rico executed the mother of all news dumps on Sunday night," Kelley said, adding "the market must decide whether or not this is the beginning of a larger breakdown of the global Prisoner's Dilemma.
"In this case the Prisoner's Dilemma is if they all keep their mouth shut, investors keep buying their debt. On the other hand, the first few to confess may be able to negotiate a deal."
Puerto Rico was considering taking on another $2.9 billion of debt before it commissioned an economic study that made García say "no more."
He told The Times that the commonwealth "could not continue to borrow money to address budget deficits while asking its residents, already struggling with high rates of poverty and crime, to shoulder most of the burden through tax increases and pension cuts."
Puerto Rico's creditors have to feel the pain as well, he said.
We'll see how much pain Wall Street is willing to take.
Soyrce: http://www.nytimes.com/2015/06/29/b...-says-islands-debts-are-not-payable.html?_r=0Puerto Ricos 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.
The governor, Alejandro García Padilla, and senior members of his staff said in an interview last week that they would probably seek significant concessions from as many as all of the islands creditors, which could include deferring some debt payments for as long as five years or extending the timetable for repayment.
The debt is not payable, Mr. García Padilla said. There is no other option. I would love to have an easier option. This is not politics, this is math.
It is a startling admission from the governor of an island of 3.6 million people, which has piled on more municipal bond debt per capita than any American state.
A broad restructuring by Puerto Rico sets the stage for an unprecedented test of the United States municipal bond market, which cities and states rely on to pay for their most basic needs, like road construction and public hospitals.
That market has already been shaken by municipal bankruptcies in Detroit; Stockton, Calif.; and elsewhere, which undercut assumptions that local governments in the United States would always pay back their debt.
Puerto Ricos bonds have a face value roughly eight times that of Detroits bonds. Its call for debt relief on such a vast scale could raise borrowing costs for other local governments as investors become more wary of lending.
Perhaps more important, much of Puerto Ricos debt is widely held by individual investors on the United States mainland, in mutual funds or other investment accounts, and they may not be aware of it.
Puerto Rico, as a commonwealth, does not have the option of bankruptcy. A default on its debts would most likely leave the island, its creditors and its residents in a legal and financial limbo that, like the debt crisis in Greece, could take years to sort out.
Still, Mr. García Padilla said that his government could not continue to borrow money to address budget deficits while asking its residents, already struggling with high rates of poverty and crime, to shoulder most of the burden through tax increases and pension cuts.
Continue reading the main story
Related in Opinion
A camp set up by demonstrators in front of the capitol building in San Juan, Puerto Rico.
Editorial: Puerto Rico on the BrinkAPRIL 29, 2015
He said creditors must now share the sacrifices that he has imposed on the islands residents.
If they dont come to the table, it will be bad for them, said Mr. García Padilla, who plans to speak about the fiscal crisis in a televised address to Puerto Rico residents on Monday evening. What will happen is that our economy will get into a worse situation and well have less money to pay them. They will be shooting themselves in the foot.
With some creditors, the restructuring process is already underway. Late last week, Puerto Rico officials and creditors of the islands electric power authority were close to a deal that would avoid a default on a $416 million payment due on Wednesday.
With other payment deadlines looming, Mr. García Padilla and his staff said they would begin looking for possible concessions on all forms of government debt.
The central government must set aside about $93 million each month to pay its general obligation bonds a crucial action in Puerto Rico because its constitution requires such bonds to be paid before any other expense. No American state has restructured its general obligation debt in living memory.
The governments Public Finance Corporation, which has issued bonds to finance budget deficits in the past, owes $94 million on July 15. The Government Development Bank the commonwealths fiscal agent must repay $140 million of bond principal by Aug. 1.
My administration is doing everything not to default, Mr. García Padilla said. But we have to make the economy grow, he added. If not, we will be in a death spiral.
A proposed debt exchange, where creditors would replace their current debt with new bonds with terms more favorable to Puerto Rico, signals a significant shift for Mr. García Padilla, a member of the Popular Democratic Party, who was elected in 2012. His party is aligned with the Democrats on the mainland and favors maintaining the islands legal status as a commonwealth.
He said that when he took office, he tried to balance the fiscal situation through austerity measures and fresh borrowing. But he saw that the island was caught in a vicious circle where it borrowed to balance the budget, raised the debt and had an even bigger budget deficit the next year.
Residents began leaving for the mainland in droves, and Puerto Ricos credit was downgraded to junk, making borrowing extremely expensive.
Only a few months ago, the administration was considering borrowing as much as an additional $2.9 billion, which would be paid for by a fuel tax.
But recently, Mr. García Padillas team has been laying the groundwork for more drastic action. The governor commissioned a study of the financial situation by former officials at the International Monetary Fund and the World Bank. Concluding that the debt load is unsustainable, the report suggests a bond exchange, with the new bonds carrying a longer/lower debt service profile, according to a confidential copy reviewed by The New York Times. The García Padilla administration made the report public on Monday.
There is no U.S. precedent for anything of this scale or scope, according to the report, one of whose writers was Anne O. Krueger, a former chief economist at the World Bank and currently a research professor at the School of Advanced International Studies at Johns Hopkins University.
The Krueger Report, as it is being called, also seems aimed at the Obama administration and Congress, both of which have taken a largely hands-off approach to Puerto Ricos fiscal problems. United States Treasury officials, however, have been advising the islands government in recent months amid the worsening fiscal situation.
In June, Puerto Rico hired Steven W. Rhodes, the retired federal judge who oversaw Detroits bankruptcy case, as an adviser. The government is also consulting with a group of bankers from Citigroup who advised Detroit on a $1.5 billion debt exchange with certain creditors.
In Washington, the García Padilla administration has been pushing for a bill that would allow the islands public corporations, like its electrical power authority and water agency, to declare bankruptcy. Of Puerto Ricos $72 billion in bonds, roughly $25 billion were issued by the public corporations.
Some officials and advisers say Congress needs to go further and permit Puerto Ricos central government to file for bankruptcy or risk chaos.
There are way too many creditors and way too many kinds of debt, Mr. Rhodes said in an interview. They need Chapter 9 for the whole commonwealth.
Hedge funds holding billions of dollars of the islands bonds at steep discounts are frustrated that the government has not seemed willing to reach a deal to borrow more money from them.
We want to be a part of the solution to the commonwealths fiscal challenges, a group of investment firms, including Centerbridge Partners and Monarch Alternative Capital, wrote in a letter last week.
An aide to the governor said the hedge funds debt proposal was too onerous. And the deal would only postpone Puerto Ricos inevitable reckoning.
It will kick the can, Mr. García Padilla said. I am not kicking the can.
