401kRollover Blog

Puerto Rico has defaulted on a debt payment for the first time in its history, confirming on August 4 that it had failed to make a bond payment of more than $50 million.  The U.S. commonwealth had been openly stating for months that the crisis was coming, with governor Alejandro Padilla saying at the end of June that the country could no longer make payment on its $73 billion total debt. Bondholders have now written to the island’s senior officials, demanding full payment on the defaulted bonds. Puerto Rican officials say there is no legal obligation to pay the bonds, which were issued under special terms as part of a financing process for government projects. Puerto Rico is also trying to deny that its non-payment constitutes default, as it paid $628,000 of the money due. The Moody’s Corporation, a global capital markets credit-rating and research company, says it views the latest development as a clear default.

So what do these developments mean? Comparisons with Greece could be misleading. Puerto Rico has a much better safety net in the form of U.S. money which continues to support health care, housing and policing. The situation may not have the same ramifications for the U.S. as the Greek crisis does for the Eurozone, which possibly explains the hands-off attitude of the U.S. government so far. However, now that Puerto Rico is headed down the path of default, questions abound regarding if, how and when the U.S. will intervene in terms of a bailout.

In terms of alternatives, the Puerto Rican government has suggested that the U.S. may be able to guarantee the commonwealth’s debt, which would lower the cost of borrowing in the market again. Puerto Rican officials say they intend to have a restructuring plan drafted by September 1, and, with further debt payments due in January, the level of U.S. involvement needed to facilitate this restructuring remains to be seen. If you are concerned that the Puerto Rican debt crisis will severely affect U.S. investors, please Like & Share this post.