Puerto Rico’s government earlier this week put out a rescue plan to save its economy from collapsing under $US73 billion worth of debt.
In a televised address, the Governor said the island might run out of cash as early as November unless immediate action was taken.
Already, though, it’s clear the market doesn’t think the plan is going to work. S&P has downgraded the island’s debt from CC to CCC, and maintained a negative outlook.
The problem is this: the two things that need to happen for Puerto Rico’s rescue plan to work probably aren’t going to happen.
First, Congress has to act. And if you hadn’t noticed, the House and Senate are most preoccupied with a looming government shut down and legislative jockeying around the Iran nuclear deal.
Not going to happen.
Second, Puerto Rico’s Wall Street creditors are going to have to sit down at the negotiating table and make concessions, and do so outside a formal bankruptcy process.
Good luck with that.
What the Governor wants
On Wednesday Puerto Rican Governor Alejandro Garcia Padilla addressed his people with a plan to restructure the debt burden that, in an earlier address in July, he had said the commonwealth could no longer shoulder.
In it, he basically said three things. First, that the island would have to make sacrifices. There will be tax hikes and spending cuts. Creditors like that, but they will probably want to see more of it.
Second, the Governor said that he wanted to create a five member control board that would take charge of almost all government entities. The problem is that S&P doesn’t think that he can actually do that without legislative approval.
“In our view, it may be difficult for the governor to obtain the requisite legislative approval to cede significant fiscal power to a financial control board,” S&P said in a statement announcing its downgrade.
The ratings agency isn’t the only one to doubt when Puerto Rico will be able to get the action it needs from Congress.
Morgan Stanley said in a recent note: “We doubt Puerto Rico’s ability to execute this style of restructuring without US Congressional action, keeping us from adopting a clearly bullish position.”
Then the Governor said he would appoint a group of people to negotiate terms with creditors. Wall Street will not like that, especially not when it sounds like the group’s mission is the following:
“…I have appointed a team of experts in debt restructuring that will sit down with creditors and negotiate with them terms under which Puerto Rico can return to a sustainable path of economic growth,” said the Governor.
“Sustainable path of economic growth” is code for creditors making concessions, like taking a haircut on their debt. Wall Street isn’t about to make any of those concessions without nasty a fight, especially if they’re not legally compelled to do so.
In other words, this isn’t going to be polite.
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