Trump's offhand comments on Puerto Rico send markets reeling

October 4, 2017, 3:38am

Offhand comments from President Donald Trump rocked the market for Puerto Rican government bonds Wednesday, after he seemed to suggest that the creditors of the island—which was in a deep economic crisis even before it was hammered by hurricanes last month—would likely be wiped out.

Speaking to Fox’s Geraldo Rivera in a television interview that aired Tuesday evening, Trump said: “You know, they owe a lot of money to your friends on Wall Street. That’s going to have to be — you know, you can say goodbye to that.”

Advertisement

The president’s comments helped send the price of Puerto Rico’s bonds on Wednesday to record lows. One of the island’s notes due in 2035 fell to just 12 cents on the dollar on Wednesday morning, according to Bloomberg.

“We are going to work something out. We have to look at their whole debt structure,” Trump said.

Administration officials seemed to work to walk back the president’s comments.

“I wouldn’t take it word for word with that,” White House budget director Mick Mulvaney told CNN, in response to the president’s comments.

Puerto Rico, a U.S. territory, filed for a form of quasi-municipal bankruptcy protection in May, citing over $70 billion in debt. Under federal law, the island cannot file for bankruptcy protection, which would give it time to restructure its debts under court supervision, as a company, city, or even a full-fledged state would. Instead, Puerto Rico filing under the Puerto Rico Oversight, Management, and Economic Stability Act of 2016 gave it a more limited set of protections.

Now the debt crisis is getting increased attention in the wake of Maria, as storm recovery from which will undoubtedly be expensive. The storm wreaked about $95 billion in property damage in Puerto Rico, according to the credit-rating agency Moody’s.

Other key developments:

  • Shares of companies that insure Puerto Rico’s bonds also tumbled Wednesday amid the bailout speculation. MBIA was down 8 percent, Ambac Financial Group was down 6 percent, and Assured Guaranty was down 3 percent in late afternoon trading in New York.
  • The Puerto Rico debt crisis dwarfs the size of even history’s most infamous municipal bankruptcy filings on the U.S. mainland. For instance, Detroit cited about $20 billion billion in bad debts when it filed for bankruptcy in 2013. And Orange County, Calif., had a shortfall of about $1.5 billion on bad investments when it filed for bankruptcy in 1994.
  • Mohamed El-Arian, former chief executive of the bond-investing giant Pimco, told Bloomberg on Wednesday that even without a federal bailout, Puerto Rico is likely to renegotiate its debts on a private basis with creditors soon. “Hopefully, this can be done as part of an orderly debt restructuring,” El-Arian said. “But if you look forward, there has to be debt reduction.”