'Wipe out' Puerto Rico debt? Hedge funds, residents at risk of losses
Eliminating Puerto Rico’s massive debt would speed the island’s recovery following Hurricane Maria’s devastation, but it could also lead to crushing losses for investors.
The list of losers would range from wealthy hedge funds that made risky bets on the island's debt to Puerto Ricans who are already struggling financially.
Puerto Ricans own about 40% of the island's debt while hedge funds own about 20%, according to Municipal Market Analytics, a Concord, Mass.-based research firm.
Others who could suffer losses include mainland American retirees, mutual fund investors and individuals who snapped up Puerto Rican bonds to take advantage of their tax-free status.
The hodgepodge nature of the U.S. territory's borrowing illustrates the complexity of the ongoing attempt to disentangle the island from its $74 billion debt, which makes rebuilding a nearly impossible task absent a major intervention.
Moody’s pegged Puerto Rico’s Maria losses at up to $95 billion, including the destruction of the island’s electrical grid and massive damages to communications infrastructure, homes, businesses, hospitals and roads.
Momentum is building for a significant cut in Puerto Rico’s liabilities after President Trump suggested Tuesday that they should be axed. Afterward, the island’s bonds tumbled to an all-time low, illustrating the gravity of his remark for investors.
The benefits of Trump's proposal: financial breathing room for Puerto Rico to rebuild.
The downside: losses for companies and people who bet their finances on the island.
"Wiping out Puerto Rico debt is not necessarily the ideal outcome for Puerto Ricans," said Josh Esterov, an analyst who tracks Puerto Rico for independent research firm Credit Sights. "You’re wiping out a lot of their savings. Even if it’s good for the economic profile of the commonwealth going forward, I don’t think that’s the desired outcome."
No one disputes that Puerto Rico needs debt relief to pay for essential services and get back on its feet after Maria.
The question is: Which pot of money will provide that help?
It could come in the form of an injection of money from Washington, though it's more likely aid would be funneled directly into emergency rebuilding.
Trump and lawmakers could apply pressure on Puerto Rico's federal oversight board to push for steep debt cuts negotiated in court, which would mean losses for creditors. But a federal judge would have to sign off on those cuts, and the process could take years.
The last resort is the island's own meager finances.