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About That New, Dreadfully Misnamed Puerto Rico Bailout law

Jul. 1, 2016
by Bob Adelmann

Investors saw the market values of their Puerto Rican bonds soar with news that Congress passed the “Puerto Rico Oversight, Management and Economic Stability Act” (PROMESA). They had a right to be happy: prior to the news their long bonds were trading at about 62 cents on the dollar. Afterwards they jumped to 66 cents. Still a paper loss of a third of their initial investment, but better than anticipated.

What’s anticipated is that the new oversight board, populated with politicians (but none from Puerto Rico), will solve all of the island’s problems, get past its recent defaults, and allow new financings to come to market. It won’t matter that the island has already defaulted on $500 million in debt service so far this year, and will default on Friday, July 1 on most of another $2 billion. It won’t matter that its bonds are rated junk. And it certainly won’t matter that nothing will be done to make the country’s economy stronger. What matters is the yield. In a yield-starved economy, thanks to ZIRP, investors see the juicy returns (12 percent on its 2035 bonds), they see triple-tax exemption, and they line up around the block.

The news caused Dick Larkin at Stoever Glass & Co., which brokers junk bonds like those issued by the bankrupt government of Puerto Rico, to become positively giddy: now we can get back to business!  He said that the new board will “enable Puerto Rico to be self-sufficient and able to sell bonds in the future for its operation and capital needs.” The fact that those new issues, when they come to market, are likely to be used to retire some old issues and make the interest payments on the rest is of little matter. Of even less concern is the sense in using bonds to pay for the operating expenses of a government. It doesn’t matter. PR’s new bonds will be scooped up by yield-hungry investors and hedge funds like acorns by a hungry squirrel.

The president himself was also giddy with excitement, claiming that the new law is actually going to do something substantial: “The bill [I’m about to sign into law] is not perfect but it is a critical first step toward economy recovery and restored hope for millions of Americans who call Puerto Rico home.”

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