Puerto Rico Triggers Largest Ever US Muni Bankruptcy Process

“We’re going to protect our people.” Hedge funds reel.

Puerto Rico’s Governor Ricardo Rosselló took the momentous step on Wednesday to trigger the largest municipal bankruptcy-type process in the US, four times larger than the prior record, Detroit’s bankruptcy.

Puerto Rico’s population has declined by about 10% since 2004 to 3.4 million. Its economy has declined by as much since 2005. Unemployment is at 14%. Public deficits have ballooned. Puerto Rico and over a dozen agencies, after years of reckless spending amid an aiding and abetting bond market, piled up about $73 billion in debt. That this was a mega problem became official two years ago; bonds crashed, and bond insurers got clobbered.

As multiple defaults have rippled through Puerto Rico’s debt since then, hedge funds jumped into the fray and snapped up the beaten-down bonds. They figured since US states cannot file for bankruptcy the US territory couldn’t either, and that much of the debt would have to be repaid, no matter what the cost to Puerto Rico and its people.

This calculus took a serious hit today.

“We’re going to protect our people,” Gov. Rosselló announced at the press conference in San Juan, after holders of defaulted bonds had filed a slew of lawsuits. He said one of the lawsuits claimed that bondholders should get all revenues generated by Puerto Rico’s Treasury Department. “I’m not going to allow that to happen,” he said.

The emailed statement by the Office of the Governor puts it this way:

In order to ensure the essential services to the public, the payment of the government payroll and the suppliers, Governor Ricardo Rosselló notified yesterday to the Fiscal Oversight Board (FOB) that the Government of Puerto Rico wishes to seek protection under Title III of the PROMESA Act.

After extensive discussions in good faith and the opening of the financial books of the Government of Puerto Rico to the creditors, there has not been sufficient progress in the negotiations, so that Title III of the PROMESA Act allows for a special court to restructure the public debt of Puerto Rico.

This is the bankruptcy-type process created last year by US law to help Puerto Rico restructure its debt under the supervision of a federal district court and emerge from its terrible debt crisis.

“The board has agreed to submit Title III protection immediately and they will submit it,” the governor said.

Thus the commonwealth is entering into the a bankruptcy-like process. A federal district court judge will preside over figuring out how to restructure a certain part of Puerto Rico’s debt, how big the haircuts will be, and how long payments will be stretched out.

“We remain committed to maintaining negotiations in good faith to reach agreements with creditors,” Rosselló said. “The best example that shows we can have dialogue is the Restructuring Support Agreement recently established with the creditors of the Puerto Rico Electric Power Authority. However, given the deficit that we have inherited, it is my responsibility to guarantee the best interests of the Puerto Rican people.”

Rosselló, who has been governor since January 2017, pointed out that during the transition hearings in December, it was revealed that the government deficit was actually $7.6 billion and not $3.2 billion, as the previous Administration had reported. He added:

“We are here to address the problems of Puerto Rico, not to look at the past, and I am convinced that our Island will be able to resume the path of economic development with the correct steps by the Government and the determination of each of its residents.”

“It is my hope that the Government’s Title III proceedings will accelerate the negotiation process, leading to as much creditor consensus where possible and achieving where necessary a prompt and efficient judicial resolution of any issues or disputes.”

Bondholders have 120 days to challenge the move.

According to the Associated Press, the governor’s representative to the board, Elias Sanchez, explained that unlike a standard bankruptcy in the US, a judge cannot unilaterally seize any of Puerto Rico’s assets without prior authorization from the federal control board.

No one knows how long the process will take and how big the losses will be for bondholders, only that it will take a long time and that the losses will be big. Puerto Rico is preparing to implement a number of austerity measures – for years to come. Uncertainty abounds. New investors that Puerto Rico needs are skittish. The government is still running a deficit. Practically no one is going to come out ahead in this deal.

Puerto Rico’s general obligation bonds due in 2023, among the most active according to Bloomberg, traded for an average of 66 cents on the dollar on Wednesday.

The US municipal bond market, which has been asleep under the soothing mantra that munis practically never default, needs to wake up. There are a number of states in the US, such as Illinois, that sooner or later will contemplate a similar fate for their bondholders, and pressure will build on Congress to allow it.

And there are plenty of cities, school districts, and other municipalities lining up for relief. Pension obligations weigh heavily, and someone is going to take the hit.

Default risk is real, even if it has been dragged out and watered down by the Fed’s interest rate repression and the chase for yield by desperate investors that will buy anything – even junk rated bonds issued by Chicago – thus keeping the scheme afloat a while longer. But debt, when it has become too large to be dealt with, doesn’t just go away quietly.

Chicago is already taking up a special place in the housing scenario playing out in the top rental markets in the US. Read…  The Great Unwind Grips the 12 Hottest US Rental Markets

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  52 comments for “Puerto Rico Triggers Largest Ever US Muni Bankruptcy Process

  1. Mike Farrar says:

    This is what you get when you let Democrats, Liberals and Socialists run your government for 60+ years. I feel sorry for the people and the pain they are going to have to go through.

    • SVen says:

      Yeah, that reaally seems the most likely culprit /s

    • David Calder says:

      Funny form of socialism when it’s the hedge funds who were expecting to draw directly from the treasury but to be expected when for Puerto Rico’s entire history, (double your 60 years), they have been treated as a colony to be milked. We still read remarks from elected officials or articles where people from the island now living main-side as having immigrated to the US. The bond makers threw money at Puerto Rico because they knew it was a rigged game because they were going to be paid and the people take the hindmost.. If our President can file 6 bankruptcies and still be considered a business genius then why can’t Puerto Rico file bankruptcy and not be labeled socialist?

      • Raymond C. Rogers says:

        This mentality is sheer rationalization. Say what you want about Trump, but Puerto Rico is a failed socialist state, and there is no denying that.

        Wolfstreet has run articles on the “model” small European socialist countries that are trading in responsible book keeping for more so socialist handouts. You can’t get around the fact that 1 minus 2 equals debt.

        • David Calder says:

          Call it rationalization all you want but if 2008 taught us a lesson is debt is only for the small.. The big enough and powerful enough will get bailed.. That’s the socialism that I see because it certainly isn’t getting to the working class.

        • Kent says:

          Socialism is an economic system where workers own the capital they use to produce a societies goods and services. Puerto Rico is not socialist. Nor is Denmark or even China.

        • GlO says:

          I would have to say, Puerto Rico is a socialist due to the US policies such as the Jones act.

      • IdahoPotato says:

        A hedge fund is a person too./s

    • gonzales27 says:

      Democrats and Liberals are really good at spending other peoples money,not so much at spending their own.

      • Wolf Richter says:

        So exactly whose money are the Republicans spending that have run Congress for years and that just passed another $1.1 trillion spending bill?

        • IdahoPotato says:

          One side’s spending is called “STIMULUS”, the other’s is called “ENTITLEMENTS”. Same difference :-)

        • wkevinw says:

          Basically correct. It’s both establishment parties who do this now. There is a minority of the Republican party who know this can’t continue forever. Basically none of the Dems believe this. That’s only difference in the parties.

          The problem is that now the public expects it. We have gotten to the point that several people centuries ago warned about from democracy/socialist government (which includes both establishment parties): these systems collapse when the voters realize they can vote themselves benefits.

          NONE of the entitlements are sound on an actuarial basis: Social Security (Medicare is part of this), etc., etc. etc. The federal budget starts there and only gets more unfortunate the deeper you look into it…

        • d says:

          “these systems collapse when the voters realize they can vote themselves benefits.”

          This echoes my complaint about the flaw in Democracy the socialist exploit to buy elections.

          By repeatedly making long term financial untenable promises to the masses of the electorate. Indirectly buying the vote with taxpayers money.

          This flaw has to be rectified, otherwise western democracies will collapse.
          Then the chines/russian “Mafia state” model, will become the global model.

        • HD says:

          Agreed. It’s not a purely socialist thing, but a political thing: votes are bought these days and damn the financial consequences. Not buying votes through ever growing welfare spending, extra government jobs or whatever other unsustainable expense = not ascending to the throne. Buying votes = going bust in the long run. Simple as that. Our modern version of catch-22.

          Socialist regimes might have proven their ineptitude time and again, but the 2008 crisis tells me that the capitalist system is equally capable of crashing into a brick wall in a spectacular fashion.

        • d says:

          but the 2008 crisis tells me that the capitalist system is equally capable of crashing into a brick wall in a spectacular fashion.

          That wasnt capital;ism.

          The events that lead to it, were criminal fraud, supported by corrupt irresponsible politicians.

          How can lending to people who don’t even have the income to male the Vig (interest payments) be capitalism.

          Even the MOB aren’t that silly.

        • Willy2 says:

          – Is that $ 1.1 trillion on top of the already existing ~ $ 3 trillion ?

        • Wolf Richter says:

          No. It was just a stop-gap spending authorization that allows the government to fund it agencies though the end of the fiscal year (Sep 30), so just for a few more months. It was not a budget.

      • james wordsworth says:

        Republicans are good at not paying for what they spend (cut taxes first and then magically growth will make up the difference, except it never does).

      • doug says:

        It is not spending money in Republican world as long you are using it to kill people with bombs . Seriously get a clue !!!

      • TJ Martin says:

        Oh Yeah ? … and how much EXTRA did congress just allocate to Trump and his family’s security well above and beyond the normal budgeted amount in order that they may keep to the lifestyle they’ve become accustomed to ?

        $120 million … on top of what the budget normally calls for . On top of !!! All while the Right/Alt Right / Neocon’s bemoan the $133 million PBS is costing . So what exactly was that again about Liberals liberally spending our money ?

    • Dave says:

      I agree that single party control in liberal areas always leads to poor fiscal management. Democrats love to spend other peoples money. Their constituents are also of the mind that the money tree is always in bloom.

      The republicans are rascals of a different hue. They just blatantly sell their constituents to the highest bidder and proudly stand by their decisions as the bribe money falls out of their pockets. Their motto should be “give to the rich, f**k the poor”.

      Both these parties have to go.

      • d says:

        “Both these parties have to go.”


        Process starts with term limits.

        The US needs a constitutional tweak, as the 2 senators per state, guarantees the power of the duopoly.

        In a 18 Th century communication system it worked, in a 21 St Century communication system, it empowers the duopoly.

    • Hiho says:

      Everything is socialist. Isn’t it?

      If they were socialist, deficit would have never ocurred, since they would have made the rich pay their fair share.

      • d says:

        If they were socialist, deficit would have never ocurred, since they would have made the rich pay their fair share.

        They did make the rich pay far more than their fair share, but like all taker socialist they spent 10 times as much as they took. Then stole another 10 times worth, to line their entitled taker Socialist pockets. So as usual, they ran out of other rich peoples money.

        Bankruptcy here we come. Or in this case as so many other in the US Blatant fraud (as they continued to knowingly borrow well beyond their possible true ability to repay) disguised as Bankruptcy.

    • Lune says:

      Wrong. Puerto Rico is behaving like a model capitalist, using the legal framework to advance their interests through a ‘strategic’ default, just like all the airlines, and our dear leader Trump. Separating suckers from their money is the essence of capitalism.

      The hedge funds, who took a risk and bought their bonds hoping for a profit, are now crying to be bailed out of their positions I. E. Socialism!

      The only reason bankrupt cities are inevitably democratic is because *every* large city is democratic (look up the top twenty and find more than one that’s run by republicans). Republicans gave up any pretense of knowing how to run the most dynamic, wealth-generating regions of this country, preferring to stick to dying rural areas where Guns, God, and Gays still holds way. And the only reason rural bankruptcies don’t make the news is because they’re small. Doesn’t mean their republican leaders are running them any better.

      Also,before Detroit, the largest muni bailout was solidly Republican orange county, CA…

    • John Doyle says:

      It’s what you get when you let politicians run the show. Forget which ideology they tout. Politicians are, in today’s complex world, just not up to speed. Also being intellectually lazy they fall back on their favourite ideology and use that to do what they are bid by the Donor Class. It’s all highly corrupt today. Corruption leads to downfall and ruin.

    • Kit says:

      Yes, because Kansas, Indiana, and other red states are in such great states for jobs,education, and healthcare compared to Washington, Minnesota, and other blue states. Do I think the liberals spend too much sometimes, yes, but you can’t argue a clear link as to why PR is in bad shape when 1) there are other factors. and 2) clearly left-leaning states can do just fine.

    • Willy2 says:

      – Yeah, sure. Blame it all on the “Lefties”. Republicans also LOVE spending (LOTS) of money.
      – In fact every US government increased spending. See this chart:


  2. Jarhead John says:

    Hey Hedgies…can you say conversione forzosa…if your lucky that is…

  3. OutLookingIn says:

    Could this be the beginning of blood running in the gutters on the street?

    Exposure is key. Those left holding will feel the pain, as latest as March some analysts still felt that risk of failure was small. Those trapped in bond ETF’s that have considerable exposure to Puerto Rico, have little doubt their capital will remain whole.

    “In the case of PZT, if any bond falls below investment grade, it would become ineligible to be held in the portfolio and would be sold by the manager”.

    The question being, at what size the hair cut will be?


  4. Meme Imfurst says:

    This how the elite ultra wealthy become the government or the major influence to government. You borrow from them and can’t pay it back, they own you. PR might as well begin looking at assets to pony up with as these sharks don’t want paper. Wonder if Elliot is in the IOU line.

    I noted the other day that this is how families such as the Rothschilds got their wealth. Lend to the government. Bureaucrats love to spend because they never had to pay the debt, you do.

    The question for the USA is, when the devil will everyone wake up? Puerto Rico is the Canary in the coal mine. We blindly spend around the world money ( not excuse me…currency because money is gold and silver, not paper) which WE DO NOT have, and perhaps, never will again.

  5. manny says:

    heard about the BART cleaner who make 180k last year ?, here why we are all going down the drain


  6. and so it begins says:

    like virtually everything today (control p)one keystroke and the dept vanishes,fed will simply print up a fresh trillion (or 2),have a few trillion left to bail out cali,illonois,new jersy,massachusetts,penn,mich. Hawaii,oregon,yada yada.they all bankrupt they just didn’t want be first In line at the printer

  7. LeClerc says:

    PR is a US colony.

    Where do colonialism and organic prosperity coexist?

  8. Petunia says:

    The Puerto Rico default is quite interesting. The govt opened the books and showed the bond holders they could only service 20-25% of the debt going forward, and the bond holders insisted they be paid with the entire balance in the treasury. The governor says, under those circumstances, he had no choice but to default.

    This article says the bonds are trading at 66 cents on the dollar, but the value, according to the PR govt is 20 cents. With this default the governor is turning over the running of the govt to the court. They are going to have to unwind this mess and this is only one set of bond holders.

    This could easily repeat in a whole lot of places. I wonder what Meredith Whitney is advising her clients.

    • Wolf Richter says:

      Whitney’s big mistake was to put a date on her prediction. That was a beginner’s faux pas. Fundamentally, she was correct.

      • d says:


        Putting dates on anything in the QE market is insane.

        does Title III of the PROMESA Act have any clause that cover predatory lending.

        Those who have lent to PR over the years, when there was clearly no ability to pay. Clearly believing they could seize State Assets in lieu of payment, should be in that category.

        Debt’s to predatory lenders in many places are unenforceable in law.

  9. Lee says:

    “Bureaucrats love to spend because they never had to pay the debt, you do.”

    They also love the salaries, perks, benefits, and especially the pensions they get after doing such a ‘good job’.

    No doubt that those pensions will be spared any pain by the courts.

  10. michael says:

    “We remain committed to maintaining negotiations in good faith to reach agreements with creditors, However, it is my responsibility to guarantee the best interests of the Puerto Rican people.”

    Perhaps it would have been in the interest of the Puerto Rican people to not over inflate benefits to permit a default in the first place.

    I can see the unions now…. How did this happen?

  11. jb says:

    let PR restructure . PR was decimated by the departure of many pharmaceutical companies that thrived there due to a tax loophole congress gave these companies . This tax incentive is no longer in effect. John Oliver (HBO) has a humorous twist on the conditions that lead up to PR’s demise. It may have been posted here but it is worth revisiting anyways. PR also recently enacted major tax incentives : Among these are Act 20 and Act 22, which provide for corporate tax rate of just 4% for companies exporting services outside of Puerto Rico, as well as a full exemption for individuals from taxes on most types of investment income. A noted financial pundit/gold seller took up residency to avoid personal income paying taxes.(he only has to stay there a small part of the year) Also Congress amended the bankruptcy code to exclude Puerto Rico, in 1984 . This exclusion made their bonds more attractive. If they can pull off the restructuring and the dust settles PR will be poised for growth.

  12. muppet says:

    Speaker Paul Ryan led passage of a bill to entangled the USA (taxpayers) in backstopping PR. As you recall Ryan said default will not occur as we have also assigned a blue ribbon panel to guide PR away from the default… so don’t worry about the USA (citizens) being a backstop because default will never occur. Thank you Speaker Ryan. Enjoy your PR vacations.

  13. chip javert says:

    Somebody take notes on this government bankruptcy stuff (or whatever its called) so CA can do it (I mean, unless single-payer & the hi-speed train saves them).

  14. Rick says:

    “…after years of reckless spending…”

    The only difference between the government of Puerto Rico and the federal government is that the federal government can print as much money as it wants.

    • Kent says:

      The only difference…

      The use of “only” seems out of place. I would consider that a wildly different circumstance.

  15. walter map says:

    “Puerto Rico and over a dozen agencies, after years of reckless spending amid an aiding and abetting bond market, piled up about $73 billion in debt.”

    Like Greece, Puerto Rico was set up by predatory lenders who weaseled their agents into the government and loaded the countries up with debts that could not be repaid.

    Naturally, Goldman Squid is in the middle of it. It’s what they do:


    Also naturally, it is the disempowered ‘socialists’ who vainly tried to stop them who will be blamed by the Squid’s trolls. Blaming the victims is just the standard playbook. And, again naturally, it will be the predators who will get bailed out – at the expense of the victims. Which clearly shows that the only ‘socialism’ going on here is the socialism for the wealthy predator class, in other words, capitalism, the capitalism of corruption.

    Greece was just for practice. Puerto Rico was just for sport. The real target is the US, and bankster corporate predators have a lock of both political parties, and there is no escape.

    “…bondholders should get all revenues generated by Puerto Rico’s Treasury Department.”

    Again, we see that it is as Adam Smith said:

    All for ourselves, and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind.

    Wealth of Nations, III, 4, 10

    Rinse and repeat.

  16. Willy2 says:

    – The most interesting is that the law has been changed to allow these financial restructuring to take place. As it was previously impossible.
    – No matter how you want to slice it or dice it, everyone will be forced to take a financial haircut.

    • Willy2 says:

      – It also will make hedge/vulture funds more cautious. And that’s a positive development.
      – Seems that the Obama adminsitration did – at least – something right.

Comments are closed.