“Main Street America owns this debt for the most part,” Long remarked. “These aren’t vultures circling the island,” says the narrator.
Over the previous decade, investors have rushed into Puerto Rican bonds, supporting the island’s unsustainable spending spree. They continued to acquire Puerto Rican debt despite the island’s 11-year recession, which exacerbated the financial catastrophe. Hundreds of thousands of citizens were forced to depart the island due to high unemployment, further weakening the tax base.
Due to these risks, Puerto Rico was compelled to pay high interest rates, which enticed bond investors looking for a safe haven in a world of record low rates. Another benefit: Puerto Rico’s debt is tax-free on three levels. This means that the interest earned on the bonds is not subject to federal, state, or local taxes.
According to Morningstar data, about 300 bond mutual funds own Puerto Rican debt. Mutual funds run by popular brands like OppenheimerFunds, Franklin Templeton, and others are among the biggest investors.
Who is responsible for Puerto Rico’s debt?
Residents of Puerto Rico possess almost $30 billion, or around 42 percent of the island’s outstanding debt. They, along with local businesses, are the ones who are most affected by the government’s budget cuts and tax hikes enacted to stabilize the island’s finances. CNBC’s Michele Caruso wrote on January 24, 2014, that “Almost everything and everyone had their taxes and fees raised. Personal income taxes, corporation taxes, sales taxes, sin taxes, and insurance premium taxes were all raised or imposed for the first time. Instructors’ retirement age was increased from 47 to at least 55 for current teachers and 62 for new teachers.” For a country with a purchasing power parity (PPP) per capita of $16,300 and 41% of the population living in poverty, this is a considerable expense to bear. The legislative assembly and the governor also worked jointly to decrease operational deficits and restructure the pension systems for public employees, teachers, and judges. They also stated their intention to cut appropriations by $170 million in the current fiscal year and budget for balanced operations in the future fiscal year. On March 3, 2014, Puerto Rico’s 17th Legislative Assembly passed a bill allowing the Puerto Rico Government Development Bank to issue $3.5 billion in bonds in order to recover its liquidity. The bill was quickly signed by the Governor the next day, and it became Act 34 of 2014. (Pub.L. 2014-34).
What is the status of Puerto Rico bonds?
MIAMI, Florida On Tuesday, a federal judge approved Puerto Rico’s exit from bankruptcy under the largest public-sector debt restructuring plan in US history, nearly five years after the financially beleaguered territory claimed it couldn’t pay its creditors.
Hurricanes Irma and Maria, a series of earthquakes, and the coronavirus epidemic have only exacerbated Puerto Rico’s economic woes since it declared bankruptcy.
The restructuring proposal will cut the government of Puerto Rico’s debt, which totals $33 billion, by nearly 80%, to $7.4 billion. In addition, the agreement will save the government approximately $50 billion in debt payments.
Puerto Rico will also begin repaying creditors, albeit at a reduced rate, something it has not done in years. In 2015, the government announced that it would be unable to repay its debts.
What is Puerto Rico’s debt to the United States?
The public debt of Puerto Rico could be lowered from $70 billion to $34 billion, with debt from the Public Buildings Authority and general obligations bonds cut from $18.8 billion to $7.4 billion.
Who owns Puerto Rico in reality?
Puerto Rico is a Caribbean territory about a thousand miles southeast of Florida with a complicated colonial history and political position. Puerto Rico’s 3.2 million residents are US citizens because it is a US territory.
When did the bonds of Puerto Rico default?
Puerto Rico first defaulted on its general obligation bonds in July 2016, when it failed to pay creditors about $1 billion, and it hasn’t made any payments since.
“It is a very positive development for Puerto Rico that a cross section of large bondholders has worked with the Oversight Board to develop a consensual restructuring agreement that will expedite the Commonwealth’s exit from bankruptcy, respect the lawful priority of valid public debt, and help restore capital markets access,” said Susheel Kirpalani, an attorney from Quinn Emanuel Urquhart & Sullivan who represents bondholders in the Lawful Constitutional Deficit Resolution.
According to public disclosures, hedge funds GoldenTree Asset Management, Monarch Alternative Capital, Whitebox Advisors, and Taconic Capital possess nearly $1.4 billion in constitutionally backed debt.
According to a person familiar with the settlement agreement, the proposal, which took about three months to negotiate, is expected to be lodged with the court within 30 days, with bondholders anticipating final approval by early 2020.
The Puerto Rican government issued a statement rejecting the agreement, citing the administration’s strong opposition to pension changes, which are included in the updated budgetary plan on which the restructuring agreement is based.
In a statement, Christian Sobrino Vega, the CEO and president of the Puerto Rico Fiscal Agency and Financial Advisory Authority, said, “Not one word of the PSA (Plan Support Agreement) is considered acceptable to AAFAF.” The Spanish acronym for the agency’s name is AAFAF.
“And we can firmly state that no legislation, executive action, or other administrative approval required from the Puerto Rico government will be taken to implement an agreement that directly or indirectly supports a Plan of Adjustment that decreases payments to our retirees,” Sobrino Vega said.
After being appointed in 2017 to monitor the $73 billion reorganization, which is the largest in the history of the US municipal bond market, the island’s oversight board has made some progress in 2019.
U.S. District Judge Laura Taylor Swain, who is supervising the unprecedented bankruptcy-like proceedings, authorized a plan in February to restructure approximately $17 billion in sales tax-backed bonds, dubbed COFINA for its Spanish name. Senior bondholders received 93 percent of their money back, while junior bondholders received 53 percent.
In addition, the court granted a debt restructure for the Government Development Bank worth roughly $4 billion.
A tentative arrangement for around $8 billion in debt issued by the island’s troubled electric power authority has also been reached. The monitoring board also announced a tentative agreement on Wednesday to restructure more than $50 billion in unfunded pension liabilities.
What is the purpose of a vulture fund?
A vulture fund is a hedge fund, private equity fund, or distressed debt fund that invests in distressed securities, which are debt that is deemed to be particularly weak or in default. Investors in the fund benefit by purchasing debt at a discount on the secondary market and then selling it for a higher price than the purchase price utilizing a variety of methods. Companies, countries, and individuals are all debtors.
Vulture funds have been successful in pursuing attachment and recovery cases against sovereign debtor governments, frequently settling with them before the attachments are realized in forced sales. Settlements are usually made at a discount in hard or local money, or by issuing new debt. In one case involving Peru, a seizure jeopardized payments to the sovereign obliger’s other debtors.
What is the state of Puerto Rico’s economy?
The World Bank classifies Puerto Rico’s economy as a high-income country, while the World Economic Forum ranks it as Latin America’s most competitive economy. Manufacturing, particularly pharmaceuticals, textiles, petrochemicals, and electronics, are the main drivers of Puerto Rico’s economy, followed by the service industry, particularly finance, insurance, real estate, and tourism. Puerto Rico’s geography and political status are both determining factors in its economic prosperity, owing to its small size as an island; its lack of natural resources used to produce raw materials, and thus its reliance on imports; and its relationship with the US federal government, which controls its foreign policies while imposing trade restrictions, particularly in the shipping industry.
On a macroeconomic level, Puerto Rico has been in a state of economic depression for 16 years, beginning in 2006 after a series of negative cash flows and the expiration of the US Internal Revenue Code’s section 936, which applied to Puerto Rico. This section was critical for the island’s economy because it established tax exemptions for U.S. corporations that settled in Puerto Rico and allowed its subsidiaries operating on the island to send earnings to the parent corporation at any time without having to pay federal tax on corporate income. Puerto Rico, on the other hand, has remarkably managed to keep inflation low during the last decade. Academically, the majority of Puerto Rico’s economic woes stem from federal regulations that have expired, been repealed, or no longer apply to the island; its inability to become self-sufficient and self-sustaining throughout history; its highly politicized public policy, which tends to change whenever a political party gains power; and its highly inefficient local government, which has amassed a public debt equal to 66 percent of its gross domestic product.
Puerto Rico has a lower poverty rate than the poorest state in the US, with 45 percent of the population living below the poverty line. When compared to the rest of Latin America, Puerto Rico has the highest GDP per capita. The Commonwealth has a tremendous bond debt that it can’t service, totaling $70 billion in early 2017, or $12,000 per capita, at a time when its unemployment rate (8.0 percent in October 2018) is more than double that of the mainland. During a decade-long recession, the debt had been rising. To avoid a bankruptcy-like procedure under PROMESA, Puerto Rico must establish restructuring agreements with creditors. More specifically, since 2016, Puerto Rico has been in an unusual situation: its economy has been overseen by a federal board that is handling finances and assisting in regaining access to capital markets.
The commonwealth has a modern infrastructure, a significant public sector, and an institutional framework governed by the regulations of US federal agencies, the majority of which are present and operating on the island. The United States, Ireland, and Japan are its key commercial partners, with the majority of its products coming from East Asia, primarily China, Hong Kong, and Taiwan. In 2016, new trading partners were added, with import trade with Puerto Rico beginning in Singapore, Switzerland, and South Korea. Puerto Rico’s global reliance on oil for transportation and electrical generation, as well as its reliance on food imports and raw materials, renders the island fragile and highly reactive to global economic and climate changes.
What was Spain’s motivation for wanting Puerto Rico?
In the 16th century, the Spanish began bringing additional slaves from Africa in order to produce cash crops like as sugar cane, ginger, tobacco, and coffee. They also spent a lot of money to turn San Juan into a fortified military outpost, constructing a fortified governor’s palace (La Fortaleza) and two massive forts (San Felipe del Morro and San Cristobál) that could withstand repeated attacks from rival powers like England, the Netherlands, and France.
Puerto Rico has different degrees of economic and political autonomy under Spanish colonial control over the centuries. However, by the mid-nineteenth century, a wave of independence movements had spread throughout Spain’s South American territories, including Puerto Rico.
Puerto Rico pays how much in federal taxes?
The placement of Puerto Rico in the two tables may appear unusual. After all, neither Puerto Ricans nor U.S. companies operating in Puerto Rico pay federal income taxes. Puerto Ricans, on the other hand, pay the same Social Security and Medicare taxes as Americans.
Is Puerto Rico eligible for government assistance?
In Puerto Rico, public welfare is a system that provides food assistance, public health, education, and subsidized public housing, among other things, to the island’s poor.