Contact us
CALL US NOW 1-888-GOLD-160
(1-888-465-3160)

Congress Passes Rescue Bill But Puerto Rico Will Still Default

  by    0   0

Even with Congress giving final approval to a bill that will allow Puerto Rico to restructure its debt, the US territory will default on a $13 billion general-obligation debt on July 1.

Flag_of_Puerto_Rico

A $1.9 billion payment in principle and interest is due Friday. Puerto Rico will renege on the payment to bondholders despite a constitutional provision that says the debt has top-claim on the government’s funds. Puerto Rico Governor Alejandro Garcia Padilla said the commonwealth could not raise enough money to cover the payment even if he completely shut down the government.

As Bloomberg pointed out, Puerto Rico’s inability to make the payment shows just how bad the situation is:

The default signals the depths of the crisis on the island, which had been tapping whatever funds it could to avoid missing payments on securities backed by the strongest legal pledge…It would be the first payment failure from a state-level borrower on debt backed by the full power to raise taxes since Arkansas’s in 1933. Since August, Puerto Rico had already defaulted on debt issued by three agencies, including the Government Development Bank, though creditors were left with little recourse because the securities were backed by weaker legal safeguards.”

Meanwhile, after months of wrangling, Congress sent a bill to President Obama’s desk that could help Puerto Rico work its way out of its debt crisis. It will allow the territory to essentially declare bankruptcy. It won’t expend federal funds to bail out Puerto Rico, but will allow the island’s government to pay back debtors at less than 100%. For all practical purposes, it creates a bankruptcy process for Puerto Rico, even though you won’t find the word “bankruptcy” in the bill’s language. According to the New York Times, the legislation will not cost US taxpayers a dime. But it may leave investors in Puerto Rican bonds holding the bag:

The rescue package will not prevent Puerto Rico from missing the payment due on Friday on a $2 billion debt, and Republican congressional leaders labored to the end to reassure conservatives that the bill is not a bailout. Instead, the legislation would allow the island’s government to restructure its $72 billion total debt so it can manage payments, and create a bipartisan oversight board mostly of outsiders to guide what is sure to be a painful recovery process. Crucially, given the imminent missed debt payment, the bill also would bar lawsuits by creditors for nonpayment retroactive to December — to provide Puerto Rico ‘the breathing room,’ as Mr. Lew put it, for its government and the control board to restructure the crippling debt and devise a new budget plan.”

Passage of the rescue bill was in doubt in the Senate due to some Democratic opposition to Republican provisions setting a lower minimum wage for young workers and limiting overtime pay on the island. Ironically, US imposition of mainland minimum wages was part of what drove Puerto Rico into its current economic chaos.

Follow the latest news and its impact on the gold market. Subscribe to Peter Schiff’s Gold Videocast

There was also opposition to offering Puerto Rico the possibly of giving bondholders a haircut. But Peter Schiff has argued this was the only truly moral way forward because people who took the risk and bought the debt should have to pay for their mistake, not the US taxpayer:

If Puerto Rico is allowed to be restructured, they won’t need a bailout because the hedge funds will be the ones to lose. They’re trying to make it out like it’s mom and pops who are going to be the losers. No, no. It will be these wealthy hedge funds that are going to lose out. But they need to lose out, because they never should have bought these bonds.”

Bloomberg said  the Puerto Rican crisis hasn’t triggered broader contagion in the US municipal-bond market because investors view Puerto Rico’s problems as unique. But as we reported back in May, Puerto Rico is just the tip of the iceberg:

Investors have long-considered sovereign debt a ‘safe’ investment. But in a sense, they were ignoring reality. Loaning anybody money carries with it some level of risk. A guarantee to repay is only as good as economic realities surrounding it.”

And despite what the pundits and government officials keep saying, the economic realities appear pretty bleak.

Get Peter Schiff’s latest gold market analysis – click here – for a free subscription to his exclusive weekly email updates.
Interested in learning how to buy gold and buy silver?
Call 1-888-GOLD-160 and speak with a Precious Metals Specialist today!


Related Posts

Gold Hits New All-Time Record High

Gold hit a new all-time nominal high, surpassing the previous record set in December of the previous year. The precious metal’s price reached approximately $2,140, indicating a robust and continuing interest in gold as a safe-haven asset, despite a rather peculiar lack of fanfare from the media and retail investors. This latest peak in gold […]

READ MORE →

Is a Weak Yen Feeding the Global Gold Bull?

The gold price has been surging, with unprecedented central bank demand gobbling up supply. It has been a force to behold — especially as US monetary policy has been relatively tight since 2022, and 10-year Treasury yields have rocketed up, which generally puts firm downward pressure on gold against USD. 

READ MORE →

World Gold Council: “Blistering Central Bank Buying” Fuels Strong Gold Demand

Total gold demand hit an all-time high in 2023, according to a recent report released by the World Gold Council. Last week, the World Gold Council (WGC) released its Gold Demand Trends report, which tracks developments in the demand for and use of gold around the world. Excluding over-the-counter (OTC) trade, 2023 gold demand fell slightly from 2022 […]

READ MORE →

VIX – The Calm Before the Storm

The VIX, often referred to as ‘Wall Street’s fear gauge,‘ is currently portraying a sense of calm among investors, registering well below the 20 level. 

READ MORE →

Four States Consider Lifting Taxes on Precious Metals

Citizens of Georgia, Kentucky, Wisconsin, and Kansas may soon enjoy lower taxes on precious metals if recently introduced pro-metal bills are made law in 2024.

READ MORE →

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Call Now