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Commonwealth Financing Plans Dropped, Lenders Lose Confidence

The financing of Puerto Rico’s insular government took a serious hit yesterday as a loss of confidence in the Commonwealth by buyers of tax-free bonds forced officials to abandon plans to borrow $1.8 billion to $2.5 billion during the next few months.

They had been planning to issue $3 billion in bonds, including $600 million this month to operate the government and $2.2 billion for transportation projects, during the remainder of 2013.

Because the Commonwealth government operates at a deficit, it borrows money by issuing bonds for long-term payback to operate from day-to-day as well as for infrastructure.

The loss of confidence in the Commonwealth has been growing for some time but has picked up recently.  Monday, a decrease in the price of a 10-year Puerto Rico bond due to a lack of buyers pushed its yield up to 4.4% more than that for the highest-rated bonds issued by local governments in the nation.  The same territorial bond sold with a yield ‘only’ 3.6% higher than the best local government debt a week and a half before.

Yesterday, the yield on a 2039 Puerto Rico bond issued to pay 6% interest rose to 10.8% before settling at 9.43% — 6.36% higher than the highest-rated debt of local governments in the country.  The yield had risen from 9.2% just a week before.

Yesterday’s drop in values began with a major sell-off by Putnam Investment Funds and other large mutual fund companies.

The value of Puerto Rico bonds has decreased 17.4% this year, according to a major index.  This includes an 8.8% decrease last month.

In August, the territory sold $673 million in electric system bonds.  The debt committed to payments of a high 7.12% interest a year for 30 years. The value of the bonds has already decreased 10-15%.

Puerto Rico bonds have recently been downgraded by bond rating agencies to the lowest level of investment grade.  Some bond buyers are concerned that the credit agencies will reduce the ratings further to ‘junk’ status.

The loss of confidence is due to the Commonwealth’s consistently weak economy, which has been in recession since 2006 and which has resulted in the income gap with the States growing for four decades and a first-ever decrease in population during the past dozen years.

An additional factor in the loss of confidence is that the territory has already issued $70 billion in debt, far more than any State on a per person basis.

The “Commonwealth” party head of Puerto Rico’s bond issuing agency yesterday made a “Commonwealth” argument against the widespread investor view that the territory may well have borrowed more than it will be able to pay back — with the additional cost of high interest rates.

“Puerto Rico’s capacity to service its public debt is being unfairly compared to that of the 50 States without taking into consideration Puerto Rico’s fiscal autonomy,” acting Government Development Bank Jose Pagan complained.

‘Commonwealthers’ claim that Puerto Rico’s “fiscal autonomy” is a limitation on the Federal government’s ability to tax in Puerto Rico.  In reality, the Federal government has full authority to tax in the Commonwealth.  The territorial government’s “fiscal autonomy” is only its ability to tax to the extent that States and other territories can.

What Pagan was really saying was that the Commonwealth could generate additional taxes to pay its debt obligations. Increased taxes are likely to be a further drag on the insular economy.



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