Trump budget chief says no U.S. bailout for Puerto Rican debt

Mulvaney says the president's comment on the island's debt shouldn't be taken literally

Oct 4, 2017 @ 11:41 am

By Bloomberg News

President Donald J. Trump's budget chief said not to take the president's suggestion that Puerto Rico's debt would be "wiped out" literally, as the territory's bonds plunged to a record low Wednesday.

A benchmark general obligation bond due in 2035 plunged to a record low of 32 cents on the dollar Wednesday morning, from 44 cents the previous day, after the president's remarks.

"I think what you heard the president say is that Puerto Rico is going to have to figure out a way to solve its debt problem," Mick Mulvaney, director of the White House budget office, said in an interview 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 bondholders."

Mr. Mulvaney was tempering Mr. Trump's comments in a Fox News interview Tuesday, after the president surveyed damage on the island. "We are going to work something out" regarding Puerto Rico's debt, Mr. Trump said.

"We have to look at their whole debt structure," Trump said in the interview. "You know they owe a lot of money to your friends on Wall Street. We're gonna have to wipe that out. That's gonna have to be — you know, you can say goodbye to that. I don't know if it's Goldman Sachs but whoever it is, you can wave goodbye to that."

Puerto Rico is dealing with an immediate humanitarian disaster made worse by the long-term debt crisis that led it to declare a form of bankruptcy this year. The commonwealth's government for decades had been plagued by budget deficits caused by wasteful spending, and borrowed $74 billion. Much of that went to operations.

At a press conference in San Juan Wednesday, Gov. Ricardo Rossello said he hopes that a quarter of the island will have energy within the month. A FEMA official also speaking in San Juan said that it has now received 143,000 applications for assistance.

Reaction to Mr. Trump's assertions was immediate. MBIA dropped 4.4% pre-market after the president suggested wiping out Puerto Rico's debt, and as Puerto Rico's 8% general obligation benchmark dropped to 34 cents on the dollar, down from 44 cents Tuesday.

Mr. Mulvaney told reporters Wednesday that "the package we are working on right now" to send to Congress will deal with rebuilding and repair.

"We are not going to be offering a bailout," he said.

Mr. Trump visited the island Tuesday, where he met local officials and offered consolation to residents who have been without power and short of drinking water since the storm struck Sept. 20. An estimated 34 people were killed by the hurricane and about 93% of homes there still lacked electricity as of Tuesday.

Other officials in Puerto Rico said that time would tell what the president meant by his remarks about the island's debt load.

"We have to wait and see the extent of the comments and what that means for the debt in Puerto Rico,"Alfonso Orona, the governor's chief legal counsel, said in an interview in San Juan Wednesday. "We have to wait and see what he meant by that and how it's going to translate into some type of legislation, some type of executive action. So we don't know yet."

(More: Hurricanes that ravaged Puerto Rico also wrecked its bonds)

Moody's Analytics estimated that the island sustained $95 billion in hurricane-related damage. With little financial ability to recover from the storm on its own, the island's government will rely heavily on aid from Washington to get back on its feet.

The White House is crafting a $29 billion disaster-aid package it intends to send to Congress that would include $16 billion to shore up the federal flood insurance program and $13 billion in additional relief covering the entire hurricane and wildfire season, including major storms that hit Texas, Louisiana and Florida as well as Puerto Rico, according to a Republican lawmaker.

At a briefing with local officials in an airport hangar, Mr. Trump complained — perhaps as a joke — about the expense of the federal response to the storm. "I hate to tell you, Puerto Rico, but you've thrown our budget a little out of whack — because we've spent a lot of money on Puerto Rico and that's fine, we've saved a lot of lives," he said.

Puerto Rico began defaulting on its debts two years ago, seeking to avoid draconian budget cuts officials said would deal another blow to an already shrinking economy. With nearly half of its 3.4 million residents living in poverty, the government sought protection from creditors in May.

More Debt

With a population the size of Connecticut's and an economy smaller than Nebraska's, Puerto Rico has more debt than any U.S. state government except California, New York and Massachusetts. The debt, a result of generations of mismanagement, was enabled by Wall Street, which was enticed by the fact that Puerto Rico's debt was tax-free everywhere in the U.S. and risky enough to provide rich yields.

It is not clear how Puerto Rico's debt could just be made to disappear outside of bankruptcy court. Still, to "wipe out" $74 billion in municipal debt, billions of which are guaranteed by the island's constitution, would shake investor faith in a market long considered one of the safest of havens. Lower-rated municipal borrowers would almost certainly see their borrowing costs rise to account for the added risk.

Prices of the U.S. territory's bonds already had plunged to record lows.

The island's benchmark general obligation 8% bonds maturing in July 2035 (callable in 2020) saw $2.5 million trade at a all-time low of 44 cents on the dollar Tuesday, according to data compiled by Bloomberg. That is down from 56 cents at the beginning of September.

BlackRock Inc., Franklin Templeton Investments, Goldman Sachs's asset management unit and Loomis Sayles & Co. are the biggest holders of those notes, according to company filings between June and August compiled by Bloomberg. A spokesman for Goldman Sachs declined to comment on its holdings and plans, while officials for BlackRock, Franklin Templeton and Loomis Sayles were not immediately available for comment.

It was unclear how much, if any, commonwealth debt Goldman Sachs Group Inc. still holds in its mutual funds. As of July, significant tranches of its debt were held by companies including Aurelius Capital Management, Autonomy Capital (Jersey) and Franklin Mutual Advisers.

Spokesmen representing a group of general obligation bondholders and a group of some sales tax bondholders declined to comment. Other representatives of the island's creditors didn't immediately respond to requests for comment.

Immediate Steps

The commonwealth's budget is under the control of a federally appointed oversight board. Created by Congress to wield broad sway over the territory's finances, the panel approves the island's budget and is meant to help make unpalatable decisions such as closing schools and cracking down on tax evasion.

Puerto Rico's Fiscal Oversight Board wrote to lawmakers Tuesday asking for immediate steps to help with recovery costs that it said could rise even higher.

"The power grid has been down — infrastructure, roads, telecom, water supply, hospitals — so getting major hurricanes back to back within two weeks has caused severe damage," said Gerardo Portela Franco, who leads an agency, established to act as the commonwealth's fiscal agent in bankruptcy, which made the $60 billion initial cost estimate.

Jerome Garffer, a former board member of the insolvent Puerto Rico Electric Power Authority, said bondholders are "going to have to wait a while" as the territory recovers.

"If pre-Maria there were hardships, then post-Maria I think the paradigm has totally changed," Mr. Garffer said Tuesday night in San Juan. "Even though I am a finance guy, there are just other priorities that are more important right now then just paying the bondholders."

"At a time like this, there's just absolutely no way," he added.


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