Puerto Rico Triggers Largest Ever US Muni Bankruptcy Process

‘We’re going to protect our people.’ Hedge funds reel.
Puerto Rico’s Governor Ricardo Rossell 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 over $70 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. Rossell 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.

This post was published at Wolf Street on May 3, 2017.