Worst proposal ever! From CNNMoney:
by Jethro Mullen and Matt Egan | October 4, 2017: 6:35 AM ET
President Trump on Tuesday raised the prospect of wiping out hurricane-ravaged Puerto Rico’s crushing debt load.
“They owe a lot of money to your friends on Wall Street. We will have to wipe that out,” Trump told Fox News’ Geraldo Rivera in an interview in San Juan, the Puerto Rican capital.
The U.S. territory has been struggling with a financial crisis for years. And that was before Hurricane Maria slammed into the island two weeks ago, causing widespread devastation and leaving millions of people without power or water.
Puerto Rico’s huge debt burden — totaling $73 billion — forced it to file in May for the biggest U.S. municipal bankruptcy in history.
“I don’t know if it’s Goldman Sachs, but whoever it is, you can wave goodbye to that,” Trump said in the interview, which aired late Tuesday. “The debt was massive on the island.”
There’s more at the original, including notes that this is not a fleshed out policy by any means. But it’s important to note: only two states, California ($151,715,007,000) and New York ($137,369,089,000) have more state debt than Puerto Rico, and both have many times the island Commonwealth’s population. The island’s debt is around $12,400 per capita, a number only approached by the wholly-mismanaged states of Massachusetts ($11,100) and Connecticut ($9,862).
Let’s be clear here: if Puerto Rico’s debt is somehow cancelled, we can count on the island’s government to simply borrow more money, to keep spending more than their production justifies. And it will be the American people who are on the hook for whatever covering Puerto Rico’s debt:
by Matt Egan | September 27, 2017: 2:35 PM ET
(M)ost of that money is owed to everyday investors. Less than 25% of Puerto Rican debt is held by hedge funds, according to estimates by Cate Long, founder of research firm Puerto Rico Clearinghouse.
The rest of the debt is owned by individuals and mutual funds that are held by mom-and-pop investors.
“For the most part, Main Street America owns this debt,” Long said. “It’s not as though these are vultures circling around the island.”
Investors piled into Puerto Rican bonds over the last decade, enabling the island’s unsustainable spending-spree along the way. They kept buying Puerto Rican debt even as the island fell into an 11-year recession that deepened the debt crisis. High unemployment forced hundreds of thousands of residents to flee the island, further eroding the tax base.
These risks forced Puerto Rico to pay high rates that lured bond investors searching for healthy returns in a world of historically-low interest rates. Another bonus: Puerto Rico’s debt is “triple tax-exempt.” That means owners of the bonds don’t face federal, state or local taxes on the interest they earn.
More than 850 bond mutual funds own Puerto Rican debt, according to data compiled by Morningstar. Some of the biggest holders include mutual funds run by household names like OppenheimerFunds, Franklin Templeton, Goldman Sachs (), BlackRock ( ) and T. Rowe Price.
Why are these mutual funds ‘household names’? Because millions of Americans have 401(k) plans which hold mutual funds in those companies!¹
Assuming that President Trump isn’t just talking without any policies in mind — not like that has ever happened before — to “wipe out” Puerto Rico’s debt means that someone will have to pay, whether it is the companies which hold the debt (meaning: a whole lot of Americans are going to see their investments dramatically downgraded) or the Treasury (meaning: the taxpayers).
Shifting Puerto Rico’s debt to people who didn’t incur it will simply mean that there is no downside to borrowing money, no obligation to repay it, and thus there will be no restraint on the dysfunctional government in Puerto Rico continuing to live beyond its means. Transferring Puerto Rico’s debt to other people is a terrible, terrible idea.
Cross-posted on The First Street Journal.
¹ – Full disclosure: though I am invested in mutual funds, they are not bond funds, and are with none of the companies listed above.