Puerto Rico’s Default: It’s Every Vulture for Himself

On Jan. 4, Puerto Rico defaulted on a $37 million payment owed to bondholders by the Puerto Rico Infrastructure Financing Authority (PRIFA), and another $1.4 million owed by the Public Finance Corporation. It did manage to meet a $330 million obligation due that day on its general debt payments—but only by “clawing back” some $164 million previously allocated to PRIFA, among others, arguing that the Puerto Rican Constitution requires that the general debt obligations be given priority treatment. In other words, the government momentarily closed one gaping hole by ripping open another one—all the time destroying the population’s living standard to satisfy the vultures.

Now lawyers for the insurers on the defaulted debt, Ambac Financial, which got stuck with a $10.3 million payment, have written to Governor Garcia Padilla demanding that he return the clawbacks!

This is utterly insane—and reminiscent of the recent Portuguese bail-in, in which bonds issued by the Novo Bank “good bank” were unilaterally transferred (on EU orders) to the Banco Espirito Santo “bad bank,” where they were promptly expropriated (bailed-in). In other words, when the whole shebang starts to crumble—i.e., now—there are no rules that can possibly hold, and it’s every vulture for himself.

AEI economist Desmond Lachman caught a whiff of the matter: “This raises the very real prospect that we could be at the start of a legal free-for-all where different classes of bondholders press their claims in a legal environment where there is no bankruptcy court to adjudicate those claims and work out an orderly debt restructuring for the island.” Lachman, of course, fails to note that the only “orderly debt restructuring” possible is called Glass-Steagall, and that it will have to involve $2 quadrillion in global financial assets, not just Puerto Rico’s $72 billion in debt.

As for that debt, Bloomberg reports that Puerto Rico owes $331 million in interest payments in February, and then another $432 million in May. “The payments swell to almost $2 billion in July, when some general obligations mature.” Puerto Rico has no prospect of making these payments.