President Donald Trump comments about wiping out Puerto Rico’s US$74bn debt were meant to empathize and possibly catalyze, but his statements do not represent an actual threat to extrajudicially wipe out bondholders, research and trading firm Compass Point said in a report on Wednesday.
Here are highlights from the report:
- On October 3, President Trump made comments during an interview suggesting that the White House would work to “wipe” out Puerto Rico’s debt burden. The president’s precise policy intent is murky, and there are myriad questions regarding legality and feasibility.
- Compass Point said that it can’t gauge either the legality or the feasibility of a plan that does not exist. But the executive branch is limited in its options to address municipal debt. Congress remains hesitant to act beyond PROMESA and additional recovery funds, and market forces would complicate the path to action.
- Puerto Rico bonds are held by a diverse set of interests including hedge funds, mutual funds, and individuals. According to reports, less than 25% of the outstanding Puerto Rican debt is held by hedge funds.
- More broadly, municipal financing costs would surely rise if the markets were forced to price the risk of President Trump threatening to wipe out bondholders every time he spoke.
- Compass’s view is that President Trump’s comments regarding bondholders should be taken seriously, but not literally. These statements were meant to empathize with Puerto Rico and possibly even catalyze negotiations, but they fall far short of a feasible plan. Threats to wipe out bondholders appear more bombastic than actionable.
