Puerto Rico Skips Its Tab

Puerto Rico Debt

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What's going on?

On Monday, things in Puerto Rico went from bad to worse, as the island decided not to pay back $370 million to creditors (mainly large hedge funds).

What does this mean?

Puerto Rico has suffered from an economic recession for the past 10 years and, during that time, it has borrowed a lot of money (by issuing government bonds). Like many US state and local bonds, Puerto Rican bonds are exempt from income taxes for US residents which made them popular amongst US investors. But the fact that Puerto Rico is a territory and not a state causes a major problem: under federal law, it cannot declare bankruptcy. The island has been pushing for a legal way to restructure its debts (i.e. pay less interest and have more time to pay them back), but it needs the US Congress to pass a law allowing it to do so – and Congress hasnt come to an agreement yet.

Why should I care?

For markets: This has been a slow-burning crisis. Last summer, the Puerto Rican government said it was effectively bankrupt and didnt pay back some of its debt (the debt were talking about today is slightly different – you can read more here). And in July, a huge $2 billion re-payment isdue. Some think that US politicians might pass a law by then that will allow the territory to restructure its debts – but, as with anything in Washington, thats far from guaranteed.

For you personally: Puerto Rican bonds were popular among many investment funds. Because of their tax advantages, many US funds owned Puerto Rican bonds (and therefore many US investors, like you or your parents perhaps, were invested in them through such funds). Most of them have already sold these bonds (likely at a significant loss from where they bought them) but some may still be invested.

Originally posted as part of the Finimize daily email.

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