Puerto Rico’s Debt and Net of Blame

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<h3>James A. Klotz</h3>

James A. Klotz

A net cast to assign blame for Puerto Rico’s debt problems is ensnaring people who don’t deserve it.

Recent broadsides leveled against the commonwealth’s predicament are related to a new bill in the U.S. Senate that would drastically reduce its debt.

Under the “U.S. Territorial Relief Act of 2018,” introduced by Sen. Elizabeth Warren, Puerto Rico could terminate its debt within three years and U.S. mainland investors would receive a mere $7.5 billion in federal funds. (Puerto Rico’s outstanding debt is estimated to be more than $73 billion.)

“Greedy Wall Street vulture funds must not be allowed to reap huge profits off the suffering and misery of the Puerto Rican people for a second longer,” said Sen. Bernie Sanders, a co-sponsor of the bill.

“Disaster funding and the other resources in struggling territories’ budgets must not go to Wall Street vulture funds who snapped up their debt,” Warren said.

Puerto Rico's Debt And Net Of Blame

Individual investors hold Puerto Rico debt

What’s lost amid the incendiary talk of “Wall Street vulture funds” is the fact that a substantial amount of Puerto Rico’s debt is held by individual investors.

It’s an issue we’ve discussed previously (“Stop Ignoring Investors in Puerto Rico’s Debt Saga”), and have been encouraged to reiterate.

For example, one concerned client, the founder of a well-known consumer goods company, contacted us and stated it perfectly:

“In the impulsive drive to demonize those involved in Puerto Rico’s debt saga, an important point is lost: Rather than hedge funds characterized as villains, the people behind those loans are primarily individual investors, like us and our family, who in good faith answered the commonwealth’s request for funds.

“In other words, we’re not nameless and faceless institutions. We are law-abiding citizens.”

Indeed, investors have done what Congress and President Woodrow Wilson encouraged them to do under a law enacted more than a century ago: Invest in Puerto Rico. Among other important measures, the law granted Puerto Rico’s bonds freedom from local, state and federal taxes, regardless of investors’ state of residence.

Puerto Rico debt bill recognizes investors

Ironically, the headline-grabbing rhetoric by the bill’s authors obscures its actual provisions, which seems to recognize the position of individual investors.

The $7.5 billion would go to creditors on the U.S. mainland that held the terminated debt, which could include individual investors, trade unions, pension plans, open-end mutual funds that pledge to waive the manager’s fee for any compensation received and possibly others.

For now, the bill is more of a talking point – it hasn’t attracted any Republican co-sponsors. Regardless, it shouldn’t obscure the fact that Puerto Rico’s debt has numerous causes accrued over many years, and conflating the terrible damage caused by last year’s hurricanes with decades of economic and political missteps won’t solve its problems.

Surely, those who don’t deserve to be excoriated are the people who were encouraged to answer Puerto Rico’s call to invest in the commonwealth and did.

James A. Klotz is the President of FMSbonds, Inc.
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Jul 30, 2018

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