U.S. Fed Chief to Puerto Rico: When It Comes to $72 Billion in Debt, You’re on Your Own

If Puerto Rican officials were hoping the U.S. Federal Reserve would help alleviate its debt crisis, they’re now sorely disappointed.

Speaking in front of a House committee Wednesday morning, Federal Reserve chief Janet Yellen said the central bank had no clear path for helping the American commonwealth, whose governor, Alejandro García Padilla, admitted two weeks ago that he is unable to pay the $72 billion the government owes its creditors. For years, Puerto Rico used this money to prop up its failing economy, pay government bills, and fund social service programs.

So far, both the White House and Congress have refused to provide assistance, and the International Monetary Fund can’t help because Puerto Rico isn’t a country. On Wednesday, a bipartisan group of senators introduced a bill that would allow San Juan to apply for chapter 9 bankruptcy protection, which would give creditors a formal process to try to recoup some of what they’re owed. But it’s a long way from passage, and a similar bill has languished in the House for months.

“This isn’t a matter in which I have an opinion. It’s something the Federal Reserve can’t and shouldn’t be involved in,” Yellen told lawmakers on the House Financial Services committee hearing Wednesday.

The lack of American assistance makes it more and more likely that Puerto Rico’s bondholders, which include Franklin Templeton and OppenheimerFunds, who together hold about $5 billion of the island’s debt, are going to have to take a steep haircut on what they’re owed. At a meeting on Monday in New York, Melba Acosta Febo, the president of the Government Development Bank for Puerto Rico, pleaded with 350 of San Juan’s creditors for more time to allow Puerto Rican officials to come up with a strategy to pay them.

“I ask for your patience while we develop a credible plan that meets all of our stakeholders’ objectives,” Acosta Febo said. The meeting, which lasted less than an hour, was the first time Puerto Rican officials have faced off with the people they owe.

Acosta Febo’s comments did little to quell concerns that investors are going to take a hit on their bets in Puerto Rico. The island’s bonds are popular with money market fund managers because they’re free from federal tax.

On Wednesday, the investment management firm BlackRock said Puerto Rican bondholders are only likely to get 60 cents for every dollar they invested.

“They have all this debt that they can’t afford,” Peter Hayes, who helps manage about $116 billion of municipal bonds at BlackRock, said on Bloomberg television Wednesday morning. “How do you get out of debt? You either grow your way out — they’re not growing — or you restructure.”

If Puerto Rico defaults, it would be the largest in the history of U.S. municipal bonds.

This is potentially bad news for American investors. In 2013, about three-quarters of municipal bond mutual funds had exposure to Puerto Rican debt. U.S. savings and money market funds typically plant money in this kind of investment vehicles because they provide modest, but consistent, returns. Now, Puerto Rico threatens to disrupt this longtime trend.

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