The Puerto Rico economy keeps spiraling downward. With fears of bond defaults and/or restructurings and bondholders fighting each other for priority of payments, it’s like watching an ancient Greek tragedy unfold with the knowledge that a king or a queen, at the play’s end, will wind up with a knife in the back.
In the summer of 2013, the market compared Puerto Rico to Detroit. This comparison helped launch Puerto Rico’s downward trajectory.
These days, the market is comparing Puerto Rico to Greece. Both seem unable or incapable of getting their financial houses in order; both are barely surviving by kicking the debt can down the road.
Greece has a $350 billion budget deficit which compromises 180% of its gross domestic product, or GDP. Puerto Rico has $72 billion of debt which accounts for about 70% of its GDP.
Despite any differences, Greece and Puerto Rico share the same major challenge, according to Desmond Lachman, a former International Monetary Fund Official.
“They both need to restore order to their public finances and competitiveness to their economies within a monetary union,” with Greece belonging to Europe and Puerto Rico under the United States, noted Lachman. “This is far from an easy task, since those monetary unions preclude Greece and Puerto Rico from an independent monetary policy and from use of exchange rate depreciation either to offset the contractionary effects of budget belt-tightening or to make the country more competitive.”
Simply put, neither Greece nor Puerto Rico call the shots when it comes to monetary policy, which only increases the difficulty of putting their economies in order.
And the incredibly confusing nature and make up of Puerto Rico’s debt is an essential part of the ongoing tragedy.
“What Puerto Rican debts may have to be restructured, and how deep the pain will be, is an extremely complex financial, legal and political calculus that has led big-name investors down differing paths,” noted Robin Wigglesworth last month in the Financial Times. “The reason for the uncertainty is Puerto Rico’s tortuously tangled $72 billion debts, a hodge-podge of direct, indirect and implicit government liabilities of different rankings and legal protections, in some cases with specific — but potentially challengeable — revenue streams pledged to investors.”
A longstanding municipal bond analyst told Wigglesworth that Puerto Rico was “the most complex capital structure I’ve ever seen. It makes most corporate balance sheets look like child’s play.”
Indeed, market commentators suggest that the end is near for Puerto Rico. Guy Davidson, of Alliance Bernstein, fears that Puerto Rico has “passed the point of no return” and predicts that “everything is going to get hit and hit hard,” according to the Financial Times’ report.
Moody’s downgraded Puerto Rico’s debt even further into junk territory last month and believes that a bond default is eventual.
Meanwhile, the Puerto Rico Electric Power Authority, known as PREPA, said on Friday afternoon it had staved off the tragedy a little while longer. PREPA announced that creditors agreed to extend a key credit agreement until June 18, giving the utility time to work on a turnaround plan, according to a report from Reuters.
“PREPA, with around $9 billion of debt, faces a $400 million payment on July 1 to bondholders,” according to Reuters. “Credit ratings agency Moody’s expects the utility to default on that payment and in a note on Friday said the agreement did not change its outlook. Challenges will remain if a restructuring agreement is reached, it said.”
Rapacious hedge funds, which own huge chunks of Puerto Rico debt, are betting that the ride will last a lot longer and that they can buy low and sell high at some point, all the while reaping the large yields that these junk bonds are paying.
This blog has previously reported that investment fraud lawyers have filed cases against UBS and other peddlers of Puerto Rico bonds and closed end funds to retail investors seeking to recover their losses. The real tragedy in the Puerto Rico story is that Mom and Pop investors are the ones who will wind up with the knife in the back. Stay tuned.
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.ubspuertoricofunds.com/.