WSJ reported yesterday that Puerto Rican government representatives and US Treasury Department officials talked about a plan to workout Puerto Rico's $72 billion debt problem. According to WSJ, the plan involves creation of a "lockbox" account set up and presumably controlled by Treasury into which some of Puerto Rico's tax revenue would be deposited. Puerto Rico would issue a superbond which Treasury will administer. I presume that the new bond would be secured by the funds on deposit in the account and backed by the issuer, but not the U.S. Treasury. To make the deal work, most or all creditors would have to agree to exchange current debt on a "cents on the dollar" basis, reducing the total principal balance of Puerto Rico's debt. The "haircut" in exchange for the superbond could be an attractive option relative to the alternative.
Yesterday, Treasury confirmed that it met with Puerto Rico's governor to talk about the federal government's possible role in providing assistance. It denied that the federal government was talking about undertaking any of Puerto Rico's obligations, or in any way providing a "bailout."
The idea of a US-assisted workout for Puerto Rico's public debt is intriguing. But, it faces long odds. An obvious issue is achieving consent among a diverse group of creditors with different investment strategies and payout priorities-- always a challenge in restructuring debt outside of bankruptcy. Another issue is the challenge of collecting tax from Puerto Ricans. The territory has a large untaxed underground economy and local taxing authorities are not always transparent in the way they account for tax revenues. If Puerto Ricans don't pay their own taxes now, compliance is not likely to improve when the tax collector is the IRS.
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