Puerto Rico bonds collapse after Trump says its debt needs to be wiped out

Trump melania puerto ricoJonathan ErnstU.S. President Donald Trump, sitting between Puerto Rico Governor Ricardo Rossello and first lady Melania Trump, sits down to a briefing on hurricane damage, at Muniz Air National Guard Base in Carolina, Puerto Rico, U.S. October 3, 2017.

Puerto Rico bonds fell to record lows Wednesday after President Donald Trump suggested that the US territory’s debt may have to be written off. 

“You know they owe a lot of money to your friends on Wall Street,” Trump said in an interview with Fox News on Tuesday. “We’re gonna have to wipe that out … you can say goodbye to that. I don’t know if it’s Goldman Sachs but whoever it is, you can wave goodbye to that.”

A benchmark general-obligation bond due in 2035 fell to a record low price of 34 cents from 44 cents on Tuesday, according to Bloomberg. The bond’s price had already been falling since Hurricane Maria ravaged the island and destroyed much of its infrastructure. 

Puerto Rico’s recovery is complicated by the fact that before the hurricane, it had about $US70 billion in debt that it said it could not repay. 

“I hate to tell you, Puerto Rico, but you’ve thrown our budget a little out of whack,” Trump said while visiting on Tuesday. 

Early Wednesday, Mick Mulvaney, director of the Office of Management and Budget, said that “we are not going to bail them out,” Bloomberg reported, contrasting what Trump said. 

“Addressing the island’s debt burden should absolutely be part of the broader recovery discussion, but threats to wipe out bondholders appear more bombastic than actionable,” Compass Point’s Isaac Boltansky said in a note. He added that the legality of such a move is still in question. 

“Our sense is that President Trump’s comments were meant to empathise and possibly catalyze, but we do not believe his statements represent an actual threat to extrajudicially wipe out bondholders.”

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