President Trump went on his friend Sean Hannity’s show and told Geraldo Rivera that, regarding Puerto Rico’s massive $73 billion in defaulted debt, “you can wave goodbye to that.”
Facts have a way of making statements like that from the president seem far-fetched. For example:
- Puerto Rico defaulted on its debt in 2016, which prompted Congress to pass a law called “Promesa,” giving the island territory bankruptcy protection that it did not have prior.
- Promesa requires Puerto Rico to submit to a Financial Oversight and Management Board in return for legal recourse to abrogate contracts and deal with creditors in a bankruptcy proceeding.
- When Governor Ricardo Rossello defied the Board’s recovery plan, Aurelius Capital sued, claiming the Board itself was “handpicked by individual members of Congress,” with no Senate confirmation, and essentially forced on President Obama last year.
- Aurelius is the holder of Puerto Rico’s general obligation bonds, and therefore represents a class of creditors who believe they should be first in line for any settlement payments.
All of that to say this: Trump has very little maneuver room here. He can’t simply “pull the plug” on Puerto Rico. He could ask Congress to bail out the island’s debt or force bondholders to eat their losses. That would be a politically charged move, and likely force many small individual bond holders, pension funds, and pensioners in Puerto Rico to be wiped out.
The larger hedge funds would be able to find ways (hopefully) to avoid unsustainable losses.
The New York Times commented:
If Mr. Trump meant the federal government would work to help Puerto Rico have the debt forgiven, that could result in major losses for investors large and small. Still, it is far from clear whether the president or the federal government has the power to do that. And despite the reference to Goldman Sachs, Puerto Rico’s debt is held by a diverse universe of investors, including big hedge funds and middle-class Puerto Ricans who thought it would make a safe retirement nest egg.
Trump mentioned Goldman Sachs in his comment to Rivera. That’s ironic since GS is one of the “too big to fail” banks that would almost certainly trigger government intervention–if GS was the primary bond holder (they’re not). But this would affect a much larger circle than one bank.
Budget chief Mick Mulvaney told reporters on Wednesday, “We are not going to bail them out. We are not going to pay off those debts. We are not going to bail out those bond holders.” That seems clear enough that the federal government isn’t going pony up $73 billion to “wave goodbye” to Puerto Rico’s debt.
But Congress and Trump will likely do something to ease the massive burden of rebuilding the island’s devastated infrastructure. Perhaps that will include some kind of cash infusion to help pay down the debt or achieve some other settlement agreement.
It is quite a complex subject, as Trump acknowledged. What happens will largely depend on what Trump’s administration, working with Congress, can achieve.
The president’s remarks left investors and creditors gobsmacked. They have no idea what to expect, if anything. Meanwhile, the Aurelius suit grinds on, and if it’s successful, the entire Financial Oversight and Management Board may need to be reconstituted.
In case Trump supporters might be thinking this is 4D chess, it’s not. Trump has moved on from such child’s play into the realm of magic and haruspicy. Either Puerto Rico’s debt will simply disappear by the will of the “only I can fix” president, or Congress will bail out the troubled island, or bondholders will get the shaft.
If the federal government bails out Puerto Rico, the only question remaining will be: who gets to bail out Mick Mulvaney?