One day after Donald Trump unleashed turmoil in the municipal market, launching a selling avalanche in Puerto Rico GO bonds which crashed to all time lows, shortly after the president signaled an openness to wipe out Puerto Rico's debts during an interview with Fox News on Tuesday, the White House has thrown cold water on the prospect of Trump forgiving Puerto Rico debt.
Recall that on Tuesday night, Trump told Sean Hannity that Puerto Rico "owes a lot of money to your friends on Wall Street and we're going to have to wipe that out," adding that "You can say goodbye to that." The next morning Puerto Rico bonds plunged, with the 8s of 2035 tumbling 10 points from 44 to as low as 32, an all time low, before rebounding modestly.
To be sure, the reason for the market freak out is that bondholders were on edge that just like Obama in the GM restructuring fiasco, Trump would overturn the traditional bankruptcy process, and favor one group of stakeholders over another. In this case Trump was convinced that Wall Street is the primary holder of PR bonds, although he may have changed his mind upon learning that well over half of Puerto Rico GO bonds is in retail investor and pension fund hands.
And, as a result, when asked about Puerto Rico's more than $70 billion in debt, White House press secretary Sarah Huckabee Sanders said that the best thing for the island will be for it to use the normal process set up to deal with its debt. In other words, no debt "wipe out", and instead the bankruptcy process would be observed.
"There's a process for how to deal with Puerto Rico's debt, and it will have to go through that process to have a lasting recovery and growth," Sanders said Thursday, adding that "that is a process that was put in place and set up under Obama, and has a board of advisers that deals with that debt. It'll go through that process as we move forward."
"The president wants that to go through that process and that’s the stage we’re at on that" she concluded. In 2016, Congress established a debt oversight board tasked with controlling the island's budget and debts as a way to deal with spiraling debt in the country.
Sanders' comments were the latest attempt by the administration to walk back Trump's debt forgiveness suggestion: on Wednesday OMB head Mick Mulvaney told CNN that Trump should not be taken "word for word" and later told Bloomberg News "we are not going to pay off those debts."
Still, despite the administration's reversal, Puerto Rico bonds have failed to rebound from recent lows, and were just shy of all time lows following Sanders' statement.