Will Puerto Rico Bonds Default?

The cost of servicing Puerto Rico’s debt will drop to around $666 million over the next ten years, down from $2.1 billion before the default. Creditors will receive $7.4 billion in new debt, $7 billion in cash, and tradable assets known as contingent value instruments, which will pay off if the economy improves.

What is happening with Puerto Rico bonds?

MIAMI, Florida — On Tuesday, a federal judge approved Puerto Rico’s exit from bankruptcy under the largest public-sector debt restructuring plan in US history, nearly five years after the financially beleaguered territory claimed it couldn’t pay its creditors.

Hurricanes Irma and Maria, a series of earthquakes, and the coronavirus epidemic have only exacerbated Puerto Rico’s economic woes since it declared bankruptcy.

The restructuring proposal will cut the government of Puerto Rico’s debt, which totals $33 billion, by nearly 80%, to $7.4 billion. In addition, the agreement will save the government approximately $50 billion in debt payments.

Puerto Rico will also begin repaying creditors, albeit at a reduced rate, something it has not done in years. In 2015, the government announced that it would be unable to repay its debts.

When did Puerto Rico default on bonds?

The Puerto Rican government debt issue is a long-running financial crisis afflicting the island’s government. The problem began in 2014, when three major rating agencies downgraded several of Puerto Rico’s bond issuance to “junk status,” citing the government’s inability to repay its debt. As a result of the downgrade, the government was unable to sell more bonds on the open market. Because it was unable to get money to cover its budget deficit, the government began paying its debt with its savings, despite warnings that those savings would eventually be depleted. To avoid a situation like this, the US Congress passed PROMESA, a bill that established an oversight board with final responsibility over the Commonwealth’s budget. As the PROMESA board began to impose power, the government sought to raise income and cut costs by raising taxes, cutting public services, and decreasing government pensions. These actions exacerbated the issue by instilling widespread distrust and unrest. As of May 2017, the Commonwealth has $74 billion in bond debt and $49 billion in unfunded pension liabilities, according to a debt inquiry report released in August 2018 by the Financial Oversight and Management Board for Puerto Rico.

How much debt does Puerto Rico owe to the US?

The public debt of Puerto Rico could be lowered from $70 billion to $34 billion, with debt from the Public Buildings Authority and general obligations bonds cut from $18.8 billion to $7.4 billion.

How much debt does Puerto Rico have?

SAN JUAN, PRINCIPALITY OF PUERTO RICO — Puerto Rico’s nearly five-year bankruptcy struggle has come to an end as a federal judge signed a deal on Tuesday that reduces the US territory’s public debt load as part of a restructuring and allows the government to begin repaying creditors.

The deal, which is the largest municipal debt restructuring in US history, was authorized after arduous bargaining, contentious hearings, and numerous delays while the island recovers from fatal hurricanes, earthquakes, and a pandemic that exacerbated its economic plight.

“There has never been a public restructuring like this anyplace in America or the world,” David Skeel, chairman of a federal control board formed to monitor Puerto Rico’s finances, said of the plan.

He pointed out that there are no bankruptcy provisions for countries or US states like the one handed to Puerto Rico.

“This was an astoundingly difficult, huge, and important bankruptcy,” Skeel said, noting that the island’s debt was three times that of Detroit.

The government of Puerto Rico claimed in 2015 that it could not afford to pay its $70 billion public debt, which had accrued over decades of mismanagement, corruption, and excessive borrowing. In addition, it owed more than $50 billion in public pension obligations. A year after the United States Congress established the financial monitoring and management board for Puerto Rico, it filed for the largest municipal bankruptcy in US history in 2017.

Has Puerto Rico ever voted for independence?

The Puerto Rican independence movement refers to efforts by residents throughout the island’s history to gain full political independence, first from the Spanish Empire from 1493 to 1898, and then from the United States since 1898. Over the years, a number of groups, movements, political parties, and organizations have fought for Puerto Rico’s independence.

On the island, there are a variety of pro-autonomy, pro-nationalism, and pro-independence views and political groups. Organizations fighting for independence in Puerto Rico have tried both peaceful political measures and violent revolutionary activities to attain their goals since the early nineteenth century. The independence movement has not received widespread support from the Puerto Rican public since the second half of the twentieth century, failing to gain traction in both plebiscites and elections. In a 2012 referendum on the status of the country, 5.5 percent voted for independence, while 61.1 percent opted for statehood. In the status referendums in 1967, 1993, and 1998, independence garnered the least support, with less than 4.5 percent of the vote.

In 2012, a fourth referendum was held, with 54 percent of voters choosing to change Puerto Rico’s status, but the federal government did nothing. On June 11, 2017, the fifth plebiscite was held. It had the lowest voter turnout of any status referendum held in Puerto Rico, with only 23% of eligible voters voting. In the referendum, the option of independence won only 1.5 percent of the vote.

The Puerto Rican Independence Party won 13.6 percent of the vote in the 2020 general election, a considerable gain in support from the 2016 general election, when it received only 2.1 percent of the vote. In the 2020 elections, the anti-colonial Movimiento Victoria Ciudadana received an additional 14 percent of the vote.

How is Puerto Rico doing economically?

The World Bank classifies Puerto Rico’s economy as a high-income country, while the World Economic Forum ranks it as Latin America’s most competitive economy. Manufacturing, particularly pharmaceuticals, textiles, petrochemicals, and electronics, are the main drivers of Puerto Rico’s economy, followed by the service industry, particularly finance, insurance, real estate, and tourism. Puerto Rico’s geography and political status are both determining factors in its economic prosperity, owing to its small size as an island; its lack of natural resources used to produce raw materials, and thus its reliance on imports; and its relationship with the US federal government, which controls its foreign policies while imposing trade restrictions, particularly in the shipping industry.

On a macroeconomic level, Puerto Rico has been in a state of economic depression for 16 years, beginning in 2006 after a series of negative cash flows and the expiration of the US Internal Revenue Code’s section 936, which applied to Puerto Rico. This section was critical for the island’s economy because it established tax exemptions for U.S. corporations that settled in Puerto Rico and allowed its subsidiaries operating on the island to send earnings to the parent corporation at any time without having to pay federal tax on corporate income. Puerto Rico, on the other hand, has remarkably managed to keep inflation low during the last decade. Academically, the majority of Puerto Rico’s economic woes stem from federal regulations that have expired, been repealed, or no longer apply to the island; its inability to become self-sufficient and self-sustaining throughout history; its highly politicized public policy, which tends to change whenever a political party gains power; and its highly inefficient local government, which has amassed a public debt equal to 66 percent of its gross domestic product.

Puerto Rico has a lower poverty rate than the poorest state in the US, with 45 percent of the population living below the poverty line. When compared to the rest of Latin America, Puerto Rico has the highest GDP per capita. The Commonwealth has a tremendous bond debt that it can’t service, totaling $70 billion in early 2017, or $12,000 per capita, at a time when its unemployment rate (8.0 percent in October 2018) is more than double that of the mainland. During a decade-long recession, the debt had been rising. To avoid a bankruptcy-like procedure under PROMESA, Puerto Rico must establish restructuring agreements with creditors. More specifically, since 2016, Puerto Rico has been in an unusual situation: its economy has been overseen by a federal board that is handling finances and assisting in regaining access to capital markets.

The commonwealth has a modern infrastructure, a significant public sector, and an institutional framework governed by the regulations of US federal agencies, the majority of which are present and operating on the island. The United States, Ireland, and Japan are its key commercial partners, with the majority of its products coming from East Asia, primarily China, Hong Kong, and Taiwan. In 2016, new trading partners were added, with import trade with Puerto Rico beginning in Singapore, Switzerland, and South Korea. Puerto Rico’s global reliance on oil for transportation and electrical generation, as well as its reliance on food imports and raw materials, renders the island fragile and highly reactive to global economic and climate changes.

Does the US support Puerto Rico?

Both major US political parties (Democratic and Republican) have expressed support for Puerto Ricans exercising their right to self-determination, with the Republican Party platform explicitly mentioning support for statehood and the Democratic Party platform explicitly expressing support for self-determination.

Is Puerto Rico a welfare state?

In Puerto Rico, public welfare is a system that provides food assistance, public health, education, and subsidized public housing, among other things, to the island’s poor.

How did Puerto Rico get so much debt?

The debt issue in Puerto Rico has numerous causes. Investors in Puerto Rican municipal bonds, in particular, have benefited from favorable tax treatment for many years. This perk was taken advantage of by bond investors from all 50 states who purchased Puerto Rican bonds. When a government issues bonds, it is essentially lending money to bondholders with interest. Puerto Rico issued too much bond debt, owing in part to the tax benefit, and began relying on borrowed cash from bond issues to balance its budget.

Does Puerto Rico want to be an American state?

The possibility of Puerto Rico becoming the United States’ 51st state has been discussed. In the time that Puerto Rico has been a colonial possession, five other territories have been annexed since 1898. In 2019, 5 percent of the lower legislature voted in favor of H.R.1965 – Puerto Rico Admission Act. The bill was sent to the House Committee on Natural Resources for consideration.

A majority of voters, 54 percent, expressed unhappiness with the current political arrangement in a 2012 status referendum. In a separate poll, 61% of people said they backed statehood (excluding the 26 percent of voters who left this question blank). Puerto Rico’s legislature decided on December 11, 2012, to request that the President and the United States Congress act on the results, ending the present form of territorial status and initiating the process of admitting Puerto Rico to the Union as a state. Puerto Rico’s new representative in Congress introduced a bill on January 4, 2017 that would ratify statehood by 2025.

Another non-binding referendum was held on June 11, 2017, with 97.7% voting in favor of statehood. The turnout for this election was only 23%, which is historically low in Puerto Rico, where voter turnout generally hovers around 80%. A boycott headed by the pro-status quo PPD party was blamed for the poor participation.

The Puerto Rico Admission Act of 2018 (H.R. 6246) was introduced in the United States House of Representatives on June 27, 2018, with the goal of responding to and complying with the democratic will of United States citizens residing in Puerto Rico, as expressed in plebiscites held on November 6, 2012, and June 11, 2017, by laying out the terms for the territory’s admission as a State of the Union. In the United States House of Representatives, the admission act has 37 original cosponsors, including Republicans and Democrats.

On November 3, 2020, a nonbinding vote was held to determine if Puerto Rico should become a state. Statehood received 52.52 percent of the vote to 47.48 percent against.