President Obama at the end of June signed a new law creating a financial oversight board – or FOB – with the power to approve a court-supervised restructuring of Puerto Rico’s massive $70 billion debt.
The law came a day before the Island defaulted on a $2 billion debt payment.
The restructuring is likely to end up with bondholders “swapping old bonds for new bonds that aren’t much better than the old bonds,” according to David Litvack, a senior research analyst with U.S. Trust, as quoted in a recent Barron’s article. In other words, future defaults are practically inevitable.
Puerto Rico Governor Alejandro Garcia Padilla suggested last week that the commonwealth’s central government may not be able to borrow from the $3.7 trillion municipal bond market any time soon, as the uncertainty of restructuring the island’s $70 billion debt and its continuing recession weigh on its shrinking population, according to MarketWatch.
With no financial aid or tax incentives for investment in Puerto Rico, the FOB legislation seems like no more than rearranging the deck chairs on the Titanic. In other words, Puerto Rico is a sinking ship, and the danger now is that the FOB is merely a cosmetic change that may look helpful on the surface but doesn’t do enough to patch the gaping financial hole that is overwhelming the island Commonwealth.
And those holes are profound. The FOB law does not alter the $43 billion unfunded pension liability in Puerto Rico’s pensions or jump start programs to create new jobs. It also does nothing to address the high cost of energy and other necessities in the Commonwealth. Such entrenched problems have driven 10% of the island’s population to the U.S. mainland in the last decade.
What’s worse, doctors and other professionals are leading the brain drain from the island. Puerto Rico’s gross domestic product declined by about 1% percent last year, unemployment is skyrocketing and a Zika crisis is brewing hurting residents and suppressing tourism.
A recent opinion piece in the New York Times summed up the state of despair facing Puerto Rico. “As it finally consented to debt relief, the Senate also approved an oversight board that could tell our elected government how to handle our finances,” wrote Rafael Matos, a former senior journalist with The San Juan Star and other news organizations. “In vulgar street talk here, Puerto Rico has been stripped naked and put on show to be shamed.”
“This after we’d grown up being told we had a unique, privileged relationship with the United States — we were full citizens, free to migrate north, and autonomous to govern our own affairs, wrote TK. “But now it is clear that was a charade. We’ve learned how much it left us at the mercy of an unsympathetic Washington. Even as he offered debt relief, the Senate’s majority leader, Mitch McConnell, Republican of Kentucky, rubbed it in. ‘The U.S. territory of Puerto Rico is in crisis,’ he declared. Territory? Really? I thought that Washington granted us a far better status in 1952. As the United Nations pushed for global decolonization, Justice Breyer wrote recently, we and the Truman administration entered into a social contract that made us neither colony nor state, but something new, called a ‘commonwealth’ in English and, in Spanish, an ‘estado libre asociado’(free associated state).”
Pity the mom and pop owners of UBS Puerto Rico closed-end bond funds and Puerto Rico bonds in their retirement accounts.
Sorry, but the FOB legislation seems like a shuffling of the deck chairs on a boat before it sinks.
Zamansky LLC are securities and investment fraud attorneys representing investors in federal and state litigation against financial institutions. For more information about Zamansky LLC, please visit http://www.zamansky.com.