Puerto Rico Bonds Crash To Record Low After Trump Says Debt May Need To Be "Wiped Out"

Tyler Durden's picture

Echoing President Obama's interference in the legal bondholder process of the General Motors bankruptcy, President Trump's comments that Puerto Rico's debt "will be wiped out" yesterday has sparked a bloodbath in PR Muni bonds. Puerto Rico's 8s of 2035 have plunging to a record low 35 cents on the dollar this morning from 44 yesterday, as bondholders fled hitting any bid, worried that Trump would follow through on his warning.

And it's getting worse.

Based on his comment, Trump appears to have had the intention of punishing Wall Streeters - naming Goldman Sachs - on their Puerto Rico holdings

“We are going to work something out. We have to look at their whole debt structure,” Trump said during an interview on Fox News Tuesday. “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 good-bye to that.”

This was not the first time Trump targeted Wall Street bondholders, and last Monday Trump pointed to Puerto Rico's "massive debt" problems when he tweeted that it owes "billions of dollars" to "Wall Street and the banks, which, sadly, must be dealt with."

There are a few problems with this: for one, it is 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 LP, Autonomy Capital LP and Franklin Mutual Advisers LLC, according to Bloomberg data.

The other problem is that much of the island's debt is owed - mostly indirectly - by retail investors. As a reminder, Puerto Rico owes $74 billion.

... oh which however over $50 billion is owed to everyday investors, through Pension Funds and other intermediaries. Less than 25% of Puerto Rican debt is held by hedge funds, according to estimates by Cate Long, founder of research firm Puerto Rico Clearinghouse. The rest of the debt is owned by individuals and mutual funds that are held by mom-and-pop investors.

"For the most part, Main Street America owns this debt," Long said.

 

"It's not as though these are vultures circling around the island."

Investors piled into Puerto Rican bonds over the last decade, enabling the island's unsustainable spending-spree along the way. They kept buying Puerto Rican debt even as the island fell into an 11-year recession that deepened the debt crisis.  Puerto Rico's debt had been a major obstacle for the U.S. territory as it fought for statehood. Bondholders had asked Congress and the Trump administration to hold off on granting statehood until Puerto Rico had paid off its debt.

* * *

In an attempt to temper the market's shock after Trump's comment, Office of Management and Budget Director Mick Mulvaney told Bloomberg that "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,” adding that “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."

In addition to the PR bonds, various bond insurers have also been hit this morning, with MBIA dropping 4.4% pre-market.  With some Hurricane Maria economic damage ests. reaching $95b, Puerto Rico will likely prioritize rebuilding expenses over debt obligations, CreditSight’s Josh Esterov writes in note according to Bloomberg. If Puerto Rico were to get federal relief - perhaps via line of credit, as requested by governor - repayment of debt from federal government is likely to take seniority over existing debt obligations.

As Bloomberg notes, 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."

Maybe there are consequences for 'reaching for yield' after all.

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cossack55's picture

Whats a "consequence"?

thesonandheir's picture

Make Wall Street Poor Again!

overbet's picture

This fucking guys lets you down everyday. 

Mtnrunnr's picture

I would rejoice if he did that.

NoDebt's picture

" 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.""

Good.  About time "investors" got it through their thick fucking skulls that "full faith and credit" has it's limitations, too.  Guaranteed by their Constitution?  Too fucking bad.  You can't get blood from a stone.  Pensioners across our great land are slowly learning this.  Now investors need to learn it.  You can't wave a piece of paper around and say "but we were promised!" and pretend that's a replacement for doing your due diligence on an organization's or government's creditworthiness.  

The promise is going to be broken.  Deal with it.  They're fucking politicians.  What did you expect?  

 

GodHelpAmerica's picture

"Shake faith in markets..."

See what he did there? There are no markets anymore in a capatilistic sense. What he meant to say is it would "shake faith in central banks socializing risks"

highandwired's picture

Faith is shaking in "markets", governments, police, etc.  I'm trying to help in the "shaking" by filing a $10,750,000.00 lawsuit against the Edmonton Police Service  https://www.youtube.com/watch?v=ncvUxSlKmGo

USisCorrupt's picture

I LOVE CRYPTO CURRENCIES MORE BY THE DAY !

The_Juggernaut's picture

At least Trump understands debt.  Suckers lose.  End of story.  Fuck your bailout.

gatorengineer's picture

Maybe just put a chip in your hand so the giverment can track the number of times you have been through the soup line at the FEMA camp.  Why have an intermediate point, just go straight to the end point?

If you dont think .gov created crypto-crap so they can track the flow of fiat through the system more easily you are smoking something.  They cant stand cash, and credit while better for them, they still dont have direct control.  But with Crypto thats easy for them.

If you dont think .gov has broken blockchain then you are pretty stupid.

Handful of Dust's picture

You mean people are pissed because he'll let market forces work?

Let the bondholders take the losses; after all, they take all the profits too.

Mr. Universe's picture

The bondholders, more like the bagholders.

Let the bondholders take the losses;

Why that would be the public pensions funds.

NiggaPleeze's picture

 

There's nothing to break in blockchain to trace "money" flows.  Every single transaction is recorded in the blockchain history (which is why, over time, mining gets ever more difficult - and it's not clear if there were 100 billion transactions a day that the system would not fall apart completely as nobody would have the computing power to mine that - except the government, of course).

So there are two issues:  there is, in fact, no anonymity at all, in fact every transaction is publicly available to see, and the government can dedicate enough computing power to "re-write" the blockchain history (and hence, how much each person has in their "wallet") whenever it wants.

Fully agreed that blockchain is a total Deep State/Int'l Banker scam.

sun tzu's picture

Don't worry. Janet will buy those worthless notes from her tribesmen at par. If congress doesn't allow it, there will be tanks in the streets.

Jim in MN's picture

I think the Donald means 'paid off' rather than 'defaulted'. 

Just sayin'.

Some regular people will pay other regular people.

USisCorrupt's picture

Hello "Wiped OUT" does NOT mean Paid off. You must be a Democrat.

gatorengineer's picture

No he means Donald has Goldmans back, and he is going to socialize it.  Its likely a disgusted Trump voter like myself.

Jim in MN's picture

I voted Trump.  I am very happy with him.  But I don't think he would just default.  That's not what he meant.  Just an observation, not a worldview.

Newsboy's picture

Puerto Rican debt is like a lab class for central bankers.

Bay of Pigs's picture

You called this just the other day when some poster here tried to put a positive spin on people leaving PR would somehow benefit their economy.

Time will tell but I think you’re right. A bond default is in play.

NoDebt's picture

Yeah, I think it is.  They might not call it a default to save the reinsurnace companies, but somebody's not gonna get paid.  Once the government gets involved shit gets weird (think: GM bankruptcy).

 

 

secretargentman's picture

Government bond holders enable government excess. I have no sympathy. 

MK13's picture

Look, govt involvement means that someone close to govt will make money, always has been that way, now even worse. And regardless someone will take losses.

Bemused Observer's picture

People leaving PR would be the best thing that could happen to that island!

 

The ones most dependent on the system would likely be the first batch to go...to Florida, NY, etc. Many have family there, and this would be a fairly easy move to make. But it will be one-way for most, as they won't be returning. They'll get all 'registered' in their new place, their bennies will be switched, and life goes on, just stateside now...

 

The ones who choose to stay will be your 'rebuilders'. They will be the 'rugged individualist' types that will do the heavy-lifting and get things back in order. But they won't be able to get to work until all the others, the waste-of-skin types that are sitting around waiting for something to be DONE for them, have finally vacated.

 

Then, once they do that, they should seal off the island to all new arrivals, except for tourists, which they should quarantine in one place. Tell all the welfare 'queens', the gang bangers, and the bankers to skip the island from now on. Tell 'em "You can come here for a week or two to lie on the beach and drink margaritas...but then you haul your ass back the fuck HOME...which is NOT here!"

 

Only true 'island people' should be living there year-round. Not transplants from stateside ghettos PLAYING at being island people and making everything look like Queens, NY. Over-developing a tropical island to turn it into a clone of the shitty neighborhoods they originated from...take that shit back to the continent!

 

These islands should be as lightly-developed as possible, keep everything simple and under-populated. They will all be wiped out at some time in the future, due to hurricanes and such. There's just no sense in trying to build a mini-US down there, or cramming it full of people who will all need to be evacuated in the near future. These islands have ALWAYS had hurricanes...why do you think they were so lightly populated to begin with? The natives had the sense not to get ahead of themselves...when they wanted bigger population centers, they moved to the mainland.

There are some folks who have what it takes to live there. They are NOT the types who ask when assisstance will be coming. Buy a clue. If you aren't the type who can shrug off the loss of everything, pick up a machete, and start contructing a lean-to , and you can't dig a pit, start a fire, and gather shellfish and crabs, then you don't belong there. And if you're the type who will just sit around, depressed at what you lost, instead of singing with joy at having SURVIVED with a few friends and sitting around a fire on the beach, then you DEFINITELY are not island people. Go home, Captain Bringdown, and go file some insurance paperwork or something...

overbet's picture

Problem is there are no repercussions. Who allowed or pushed for them to overextend? Lock them the fuck up so the next ass clown thinks twice. No instead the responsible parties, the ones with the capital, get fucked and the slimy scumbags skate away.

hongdo's picture

It's always been "every man for himself". Who's lookin out for you kid?

Trust? What's that?

dot_bust's picture

Yeah, but now China is probably saying, "What about U.S. Treasuries?"

Those are a promise until they're not.

pods's picture

We've been "soft defaulting" on Treasuries for years. Deficit spending turns those yields negative.  And we've been pumping out 800 billion to 1 trillion in deficits per year for a decade.  Not the bullshit deficit that is spoken of. But the change in aggregate debt YoY.  All that debt is the money supply, so anything emitted greater than economic expansion is defaulting.

We are just buying them dinner and whispering that we love them first. But they are still getting it rammed in their collective puckered starfish.

As are all holders or people paid in $FRNs.  

Wonder why it's hard to sit down?

There's your answer.

pods

striped-pad's picture

+1 for "soft defaulting".

I don't quite agree with the "anything emitted greater than economic expansion is defaulting" though. I'd say any borrowing which the government is unable or unwilling to repay by using taxation (or selling off public assets) is defaulting.

For example, if the people had enough wealth, and were willing to allow the government to take it, in order to buy a giant gold statue of Donald Trump to put in front of the Marriner Eccles Building, the government could issue debt to build it now and tax the people later. Even if there were no economic expansion, there would be no default – the lenders to the government would eventually be repaid.

hongdo's picture

Doesn't get any simpler than "You fucked up, you believed us."

This may be the theme song of the current lazy US.

post turtle saver's picture

"that which can't be paid back, won't be paid back"

overbet's picture

Yes rejoice very well thought out

1 Alabama's picture

 wiped out? with what?? Like a cloth or something?

NoDebt's picture

This is now the 3rd time I read your comment and I think I laughed harder at it than I even did the first time.

 

Bank_sters's picture

That was here cunt moment.  The glimpse into how laughable it was that she would ever be held accountable.   She works for the bankers and is untouchable.

Personally, I think 100 year bonds at 1 percent interest will be the way to go.  Full faith and credit...

nmewn's picture

So, whatever happened to Mayor Cruz of San Juan anyways...she get a job passing out leftover "We Are All Dying Here" T-shirts or a pallet of water get dropped on her head or is she driving a truck up into the hills personally delivering food these days? 

I was really starting to enjoy her incompetence  ;-)

post turtle saver's picture

well played my fellow ZHer... well played +1

Jim in MN's picture

I thought he meant we had to wipe out their friends on Wall Street.

Oh well.

Endgame Napoleon's picture

What about the part in the article, saying that Wall Street only had a 25% investment in PR, whereas "mom-and-pop" investors and mutual funds and pension funds, with a base of ordinary investors, were the ones with the greater share of investment in PR? Didn't hedge funders do the same thing with the Greek debt?

NiggaPleeze's picture

 

That 25% is held by Squid competitors.  Squid had a tentacle mole in the WH operating under the name Munchkin and was able to unload/hedge its position long before Trump signalled the market.  And if the counterparty to that hedge goes bankrupt, that counterparty will be bailed out.  It's unlawful in the US for the Squid to lose money.

DeadFred's picture

LOL, my wife asked me the other day if I thought we should buy some California bonds so we could get some more yield. Talk about living in different worlds.

Jim in MN's picture

Do they come with free grapes? 

post turtle saver's picture

they better come with some synthetic Hollywood bimbos that can breathe through their ears, otherwise I'm not buying 'em...

ShrNfr's picture

Then again, Wall St. does not own the bonds, they just manage the funds that own the bonds. The bonds are owned by regular people.

HillaryOdor's picture

Yeah but if you're dumb enough to let them manage your money for you and/or dumb enough to think sovereign debt really is risk-free, then you deserve it anyway.

Actually these assholes are accepting and encouraging the government perpetual deficit spending model.  F 'em right in the A.  I couldn't care less.  We need to reign them in if we want prosperity for ourselves.

Endgame Napoleon's picture

The salaried employees with benefits who are often the dual-earner parents who dominate the salaried, safer jobs often just go along with what management pushes as the "benefits" package, which includes a 401k most of the time, not a pension. Wall Street wants the 401k system to dominate, likely because they make more profit off of those and less profit off of pensions, although the average 401k is not nearly enough to retire on. Most people who have any retirement savings at all just have a pittance. Some cash out their 401ks beteeen churn jobs, paying rent with it until they find another churn job, especially in my state where people often do not get UC between jobs. The majority of American citizens have no retirement savings at all.

Dr. Engali's picture

I have news for you, Wall Street will make a mint off of this deal. I can guarantee you they were well positioned to take advantage of this before they allowed Trump to make his comment.