The Case For Wiping Out Puerto Rico's Debt

Authored by Tom Sanzillo via,

President Trump, who knows a thing or two about bankruptcy, says Puerto Rico’s public debt should be wiped out. We agree.

The commonwealth owes bondholders somewhere on the order of $70 billion, with most of that debt tied to general-obligation bonds, revenue bonds and bonds issued by the Puerto Rico Electric Power Authority (PREPA).

Ahead of the wide devastation wrought by Hurricanes Irma and Maria, we were of the view that the commonwealth could manage perhaps 20 to 30 percent of its general-obligation and revenue-bond debt and that PREPA could pay off perhaps 30 percent of its debt.

Now, as the island and its economy reel from the carnage of the hurricanes, we see the only viable way forward as a zeroing-out of the bonds in question and an immediate cessation of interest payments. Puerto Rico’s badly-crippled economy must rebuild, and the only way for that to happen is for legacy governmental debt to be handled in a way that won’t impair the restoration of markets and physical development.

This is a necessary remedy that will affect three sets of bondholders.

First, the large investment houses like Franklin Templeton, Oppenheimer, Citi and JP Morgan, which own large chunks of bonds. These investment houses, however, have vast and diverse holdings in the trillions of dollars that are hedged against just about every eventuality.


Second, a host of hedge funds that bought into the Puerto Rico bond market at a discount. These hedge funds have made extraordinary gains on this debt by way of interest-rate payments on the face value of the discounted bonds.


Third, small investors who live in Puerto Rico and elsewhere who stand to suffer the most. These investors have no hedges against these losses, and (unlike hedge funds) have not reaped extraordinary gains on Puerto Rican debt.

The way out of this is not pretty but there is ample precedent.

Puerto Rico’s badly-crippled economy must rebuild, and the only way for that to happen is for legacy governmental debt to be zeroed out.

A considerable portion of these bonds are insured by MBIA, Ambac and Assured Guaranty, which are contractually obligated to take over payments, a reality that will cause some shock to their stock prices.

Puerto Rico has made premium payments on its insurance policies and the guarantors must make good on their promise. To help offset their losses, these companies can be given first option on future bond offerings by Puerto Rico.

Bondholders are not without recourse. They can—and should—pursue a course of action against the underwriters, law firms, accountants, financial advisors and credit-rating agencies that put the bond deals together in the first place. Clues on how to proceed can be found in a 2016 audit of PREPA debt. The Securities and Exchange Commission can be pressed now on its investigation of PREPA’s bond deals, and the agency can be instrumental in streamlining a resolution and avoiding needless litigation.

BONDHOLDERS THROUGH THE AVENUES ABOVE CAN RECOVER a modicum of their original investment, and as Puerto Rico emerges from its crisis the its government alongside the federal PROMESA board can establish a claim-resolution process for small investors, who should be paid 100 percent of their principal.

[ZH: as a reminder, Kyle Bass suggested PR bonds as good as worthless...The idea that the island, with a workforce of just 1.4 million people, will ever be able to pay back $70 billion in debt is ridiculous, he said.

These are two different questions - one is, should we help with hurricane? Absolutely. We should do everything possible.


Puerto Rico is just a simple math 101 question.


But on the debt question I just think you have to be a little crazy to think that $100 billion worth of debt or even $70 billion of on-balance sheet debt is worth anything with 1.4 million workers in an economy like Puerto Rico's.



When you look at sovereigns and you look at history of sovereign defaults, recoveries and wipeouts are $0.10-$0.20 on the dollar - that's what I think people are going to end up with.]

Finally, liability must be apportioned, and criminal action must result so as to restore public trust that has been damaged by the failure of a whole “stakeholder” class that is responsible for what has happened debt-wise.

The PROMESA board, whose job it is to act as a comptroller,  must come forward now and install new budgeting and debt policies, moving with an eye toward rebuilding the economy and supporting the citizenry. The board will need help from outside receivers and/or independent management. My organization, the Institute for Energy Economics and Financial Analysis, has recommended the appointment of a special inspector general.

Bond defaults in the municipal credit market are rare - especially big defaults like this one - but they happen. Moody’s Investors Services publishes an annual history of such events, and since 1970 has covered 84 instances of public bond defaults and bailouts.

Workouts typically allow some recovery by bondholders, but, more important, workouts—which vary widely by circumstance—can set the stage for borrowers to rebuild.

If the Puerto Rico economy is to have any chance of recuperation it cannot be saddled with the crushing effect of decades of bad deals.

The president presents a role model of sorts here, having been tied repeatedly to bankruptcy, and having always come back.


hedgeless_horseman Mon, 10/09/2017 - 10:41 Permalink


However, if my head is clear, I will sometimes hear the voice of Murry Rothbard.   He reminds me that by doing for these people what they could and should be doing for themselves, our government is intentionally preventing these, "descendants of slaves," from ever being truly free.  As Lyndon Johnson supposedly said, "I'll have those niggers voting Democratic for 200 years."…
tmosley Rapunzal Mon, 10/09/2017 - 10:57 Permalink

Puerto Rico should lose its ability to become a state and fall under Federal administration. PR locals should be stripped of their US citizenship and become citizens of Puerto Rico only. Perhaps allow visa-free travel but that's it. The local politicians should be removed from power permanently. If the locals want their pols and self determination back, they can vote for independence at any time. I would say make it a permanent feature on every election.Debt forgiveness at this level should have consequences. TBH, I would say that any polity that experiences the same inability to service their debt should get similar or the same treatment. Federal administration of Detroit and Chicago would be a good start. Create a strong incentive for people to flee from poorly administrated areas.

In reply to by Rapunzal

hedgeless_horseman tmosley Mon, 10/09/2017 - 11:05 Permalink


Debt forgiveness at this level should have consequences.

There you go, again, using that word, "should."As we are taught in, The Creature from Jekyll Island...

"Bailout is the name of the game."…

6.  Read, The Creature from Jekyll Island: A Second Look at the Federal Reserve - 5th Edition, by G. Edward Griffin.

In reply to by tmosley

NoDebt curbjob Mon, 10/09/2017 - 11:54 Permalink

There's not going to be a bail-out.  Those who hold the bonds are ones who get helped in a "bail-out".  In the case of PR, those who hold the bonds are, by and large, not people or institutions that have a lot of political pull.  They'll take it right up the ass, no lube.  Just like the GM bankruptcy.  That's your template.  

In reply to by curbjob

Dabooda The_Juggernaut Mon, 10/09/2017 - 14:59 Permalink

Anyone who buys ANY government debt does so in the expectation that the government will steal (or print) enough money to repay the debt plus interest.  And the borrowed money will be used  to carry out all the normal government functions of murder, theft, extortion and enslavement.  Support NO bailouts on government debts.  Fuck 'em all.  Defaulting on the national debt, state debt & local government debt is simple justice.

In reply to by The_Juggernaut

Buck Johnson auricle Mon, 10/09/2017 - 11:41 Permalink

This may also be correct but here's the situation, those politicians who are in the Senate and congress will only agree to PR getting debt forgiven aka Fed bail them out if their states can get bailed out, pure and simple.  It's a no starter no matter what Trump says, No republican is going to back up Trump to bailout PR which isn't even a state and has representation of a state and they get bailed out and not Illinios or other states?Most of those JP Morgans and others banks that monetized these bonds sold these away long ago to pension funds and other funds around the world who wanted high yeld and most likely it was the pensions hoping to get themselves out of a situation.  

In reply to by auricle

Endgame Napoleon SubjectivObject Mon, 10/09/2017 - 11:56 Permalink

That is not the way the socialism-for-some nation — the USA — does things. This country picks and chooses which poor citizens and noncitizens get free rent, free groceries and child-tax-credit welfare checks between $3,337 and $6,269, and it picks and chooses which citizens get to honor their debts and which get absolved from their debts.

I thought that PR had 3.5 million US citizens who could come here to work, further displacing millions of underemployed citizens who lack access to pay-per-birth freebies to make up the difference between living expenses and low pay, but apparently, only 1.4 million Puerto Ricans are working age.

Still, if the insurmountable debt is not wiped out, a large portion of Puerto Rico’s 1.4 million working-age citizens will come here, competing for scarce, full-time jobs and/or reproducing while single and getting all of their major monthly household bills paid, along with a yearly child tax credit of $6,269, while working the welfare-reform required 20 hours per week, thereby helping to drive down wages and the number of full-time jobs.

Since these job seekers will just be added to the hordes of welfare-bolstered illegal immigrants, H2B visas, etc., they will just add one more boulder to the avalanche of middle-class-killing blows. The MAGA agenda faces a lot of insurmountable hurdles, every bit as insurmountable as PR’s debt.

I am not sure how it helps the MAGA agenda to hold Puerto Ricans to impossible terms, forcing them onto the mainland, in effect, so I can see Trunp’s point.

The other alternative is granting them their independence. Since they are citizens, Puerto Ricans might have to vote for independence for it to be legal, or maybe, it is up to the US Congress. If not, they probably won’t vote for independence from the USA in this situation. It is hard to know. This situation is not like the flood of illegal aliens. Puerto Ricans are citizens with legal rights. Our Swamp Congress cannot even do anything about illegal aliens.

In reply to by SubjectivObject

FreeMoney hedgeless_horseman Mon, 10/09/2017 - 14:00 Permalink

Puerto Rico, like all other government entities, has shown that government entities can not mange their finances worth a shit.  Getting re-elected is always more important.   PR is just farther along the curve than Nebraska. The voters should alow PR out of its debt, AS LONG AS, it can never enter into any other form of debt. ( like pensions, retiree health benefits, or any other promise...) This would establish a new precident.

In reply to by hedgeless_horseman

Agent P tmosley Mon, 10/09/2017 - 11:23 Permalink

Why punish the people of Puerto Rico by stripping them of their US citizenship?  And why place the government under Federal administration?  There should be no bailout.  The bondholders/bond insurers took the risk, so they should take the loss.  The municipality will pay higher rates on future borrowings to compensate investors for the risk.  This will be onerous, but it will force the government (through the people) to implement reforms and improve their credit status to operate a functional government.  If not, then tough-titty-toenails...keep paying up or don't get the financing needed to operate.  If that happens, the (US) citizens of Puerto Rico can choose to stay and live in worsening conditions, or they can freely move to greener pastures within the US.  

In reply to by tmosley

tmosley Agent P Mon, 10/09/2017 - 13:06 Permalink

>Why punish the people of Puerto Rico by stripping them of their US citizenship? To encourage them to vote for independence and stop being our problem. The only other way that is long term sustain able that I can see is genocide. Do you that? Terrible optics.>And why place the government under Federal administration?Because the politicians have proven themselves corrupt and the people have proven themselves incapable of electing non-corrupt officials.>There should be no bailout.Ah, I see, so you DO favor genocide. They can't pay off that kind of debt AND recover from this hurricane and future disasters. Even with perfect weather for a hundred years I doubt if they could. The most they could hope for is a de fact rescue via white immigration (what idiots call "gentrification").>If that happens, the (US) citizens of Puerto Rico can choose to stay and live in worsening conditions, or they can freely move to greener pastures within the US.  Where they can vote for the exact same sort of dogshit that ruined their island. No thank you. Strip them of US citizenship. If they come here, all the white people will die. Cucked to death.

In reply to by Agent P

Theosebes Goodfellow tmosley Mon, 10/09/2017 - 19:24 Permalink

~"PR locals should be stripped of their US citizenship and become citizens of Puerto Rico only."~Tell that to the tens of thousands of Puerto Ricans who have served and sometimes died fighting for this country in all branches of the armed forces since WWI, asshat. That includes the sixty five thousand plus who served in WWII. Fuck you and the ignorant horse you roded in on.

In reply to by tmosley

EmeraldWI tmosley Mon, 10/09/2017 - 23:31 Permalink

Punish those foreigner peasants. Or, how about the banks that made billions convincing P.R. to issues all of that low interest debt because it was easy money -- triple tax free and sold with an implied U.S. Treasury guarantee to investors? And the same crowd wants the same Government to make them whole on their spec trade? Anger with the P.R. masses may be misplaced.

In reply to by tmosley

Abby Normal OneStinkyDinky Mon, 10/09/2017 - 10:56 Permalink

I agree.   But, the problem is that most people who own Puerto Rican bonds are not aware of it.  Becsause their credit was so bad, Congress gave them an exemption from STATE taxes too and so many state dedicated bond funds own the once higher yeilding Puerto Rican bonds.  People who thought they only owned say Nebraska or Tennesse bonds will sadly discover that their fund manager loaded up on Puerto Rican bonds too and will be surprised by the scale of the loss.

In reply to by OneStinkyDinky

Crkfx1 Mon, 10/09/2017 - 10:45 Permalink

This is the single best thing I've seen Trump support since he's been in office.  And I applaud this effort.  Wipe the Puerto Rican debt.  Next up, college tuition loans. 

pods Mon, 10/09/2017 - 10:46 Permalink

Puerto Rico is just futher along the same timeline that all debt out of nothing nations are.It's the exponential nature of compound interest that's the problem, not the fucking spics.Sure some nations/states will move along the timeline faster, but we are all playing the same game.  It won't end well. It can't.The math will always win.pods

pods tmosley Mon, 10/09/2017 - 11:38 Permalink

Do you have an argument about whether we white americans are NOT on the same timeline as the r-selected communists in PR?Because we are all operating under a fractional reserve currency paradigm. And PR cannot print it's way out of debt as the USA can. Does this make them less of a people than us?  Or does it just make them progress faster along the timeline?Same for states, anyone but the Feral government. It's the spics, greeks, italians, etc. Never do we actually look at the WHY this happens (or only in a blame way, never the exponential nature of a fractional reserve currency function).Sure they promised pensions far an above tax revenue. Most all pensions are ponzis. Some just hide it better.The fact of the matter is that the people of PR are not any different that the people of the US.  They just cannot soft default like we have been doing for years on end with deficit spending above GDP expansion.  That's a default though.  Just a kindler, gentler one. Well, not for anyone holding dollars or dollar denominated bonds, but I digress.podsEdit: Tmosley, you have been here long enough to remember all the discussions we used to have as to the nature of the money supply, before the shit throwers became the norm.

In reply to by tmosley

tmosley pods Mon, 10/09/2017 - 13:32 Permalink

>Do you have an argument about whether we white americans are NOT on the same timeline as the r-selected communists in PR?Yes, we have far fewer children, and invest an enormous amount of resources in them. That is the primary hallmark of K-selection. Whites are K-selected, we simply have been infiltrated by a (((certain group))) whose primary purpose is to destroy and replace us with a lower IQ population that is easier to control.>Does this make them less of a people than us?Yes. They are lesser in every way. Shorter. Fatter. Lower IQ. Poorer. Might as well grant rats and rabbits citizenship. If they are to survive as a quasi-modern society, they must submit to the white man's rule via imperialism. It is the only way we have at hand to elevate them.>It's the spics, greeks, italians, etc.No, on the mainland its the niggers. The systemic problems within the US and the rest of the West are caused by Jews, who are white people who are fully indoctrinated into a supremecy cult. Remove the Jews and their tools from the halls of power, then all will be fixed in short order.>The fact of the matter is that the people of PR are not any different that the people of the US.You are blind. They don't even speak the same language, for fucks sake. They will vote to take EVERYTHING from you, and it will be YOUR fault when the country collaspes. Then they will kill you. A thousand years after all the whites are dead, they will be performing human sacrifices on altars in pagan temples covered in crosses.If they are going to remain a part of our empire, then we must rule them. If they want to rule themselves, FINE! Independence granted. But they can not be allowed to rule us if we are to survive.And yes, all the monetary arguments hold true, but they pale in comparison to the demografic shift we are seeing. Put responsible people in charge, and even fiat can work (see Paul Volcker, who singlehandedly rescued the dollar from hyperinflation). The problem is that it is very rare that responsible people can maintain power permanently. Other forms of money take that temptation away from those in charge.

In reply to by pods

pods tmosley Mon, 10/09/2017 - 15:50 Permalink

PR does not have 210 trillion in unfunded mandates. How's that gonna work out for us?  We could absorb all the debt from PR and it wouldn't be a rounding error in our debt.  Per capita it might be higher, but PR debt isn't going to bankrupt the USA. We did that ourselves, promising shit we can't deliver on. I'm NOT saying everyone is created equal. What I am saying is that we are all on the same timeline. Some (communists, socialists,etc) move faster, but everyone with a currency system run by (((them))) are going down the same road.Volcker was able, for a time, to raise rates and get inflation under control.  That cannot happen today. That is the reason I still have an ARM on my house. Because if the government cannot afford high rates, we won't have high rates. pods

In reply to by tmosley

LawsofPhysics Mon, 10/09/2017 - 10:47 Permalink

When more than half of your GDP is nothing but useless fucking digit/paper-pushing, it really makes the whole "GDP" metric fucking meaningless.  Good capital continues to be chased out by bad as Mr. Yellen keeps the FREE MONEY flowing to the banking and finance class!!!Criminal fucking cunt..."Full Faith and Credit"