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Puerto Rico Bonds Collapse After Trump Says Debt Must Be Wiped Out

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Puerto Rico Bonds Collapse After Trump Says Debt Must Be Wiped Out

A Puerto Rico benchmark bond fell to record lows on Wednesday after President Donald Trump said the debt of the US territory should be written off.

“You know they owe a lot of money to your friends on Wall Street,” Trump said in a… interview with Fox News on Tuesday. “We have to wipe that out… You can say goodbye to that. I don’t know if it’s Goldman Sachs, but whoever it is, you can say goodbye to that.”

The bond with a general obligation due in 2035 fell to a record price of 34 cents on the dollar, according to Bloomberg, from 44 cents on Tuesday.

“I can’t imagine a time when a president has advised on a Muni bankruptcy case,” said Greg Clark, chief of municipal investigations at Debtwire. “We’re in — I think it’s fair to say — uncharted waters with the president’s comments,” he told Business Insider.

So-called GO bonds are distinguished by the fact that the municipality that issues them undertakes to repay the bondholders with all its available resources, including taxes and income from other projects. Puerto Rico’s benchmark GO bond had been falling since Hurricane Maria devastated the island two weeks ago, destroying much of its infrastructure.

Puerto Rico’s recovery is complicated by the fact that before the hurricane it had about $70 billion in debt that it said it could not repay. In May, it filed for the largest-ever local government bankruptcy in the US.

“I hate to tell you, Puerto Rico, but you messed up our budget a bit,” Trump said during a visit to the island on Tuesday.

Shares of companies that insure Puerto Rico’s debt also fell on Wednesday. MBIA fell 11%, Ambac Financial fell 6%, and Insured warranty 4% down.

But after Trump’s comments, Mick Mulvaney, the director of the Office of Management and Budget, told CNN that “we’re not going to save them,” adding that he wouldn’t take Trump “word for word.”

Isaac Boltansky, a policy analyst at Compass Point, said the legality of debt cancellation is still up for debate.

“Tackling the island’s debt burden should definitely be part of the wider recovery discussion, but threats to wipe out bondholders seem more bombastic than feasible,” Boltansky said in a note. “We feel that President Trump’s comments were intended to sympathize and possibly catalyze, but we do not believe that his statements constitute an actual threat to extrajudicially wipe out bondholders.”

Business Insider/Andy Kiersz, Bloomberg data

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