Record High Bond Yields Indicate Puerto Rico About to Default

Friday, October 30, 2015
By Paul Martin

SputnikNews.com
30.10.2015

Puerto Rico seems unable to pay $355 mln of debt servicing on 1 December, as indicated by the dynamics in yield on the island’s bonds.

Kristian Rouz – Yield on Puerto Rican government bonds hit its highest on the record as the 1 December debt payment deadline nears without any sound plan to resolve the stalemate offered by either local authorities or Washington. Investors and creditors are anxious amidst the lingering uncertainty, while a possible bankruptcy appears to be a most likely outcome of the debt crisis in Puerto Rico. Even so, a bankruptcy procedure in regard to a US territory has legal implications as the US laws provide rules and regulations for bankruptcies of states only.

All that means creditors and investors might lose their money. The sharp increase in bond yield attracts speculative capital though, but historically, such swings indicate a soon financial collapse.

10-year Puerto Rican debt securities now yield 12.3%, a dramatic rise from 10.1% in mid-October. This January the yield had touched the 12% threshold, dropping afterwards as concerns eased. However, this time around, easy solutions are unlikely. Puerto Rico is facing massive debt payoffs over the course of the next two and a half months, and the governor said the $72 bln debt is ‘unpayable’.

Prior to 2013, when the first signs of debt crisis appeared, the average yield on Puerto Rican bonds hovered at 5%.

Puerto Rico must pay $355 mln in early December in debt servicing, a payment the island is likely to miss. Such an outcome would be the worst option for both the island and the creditors. The Puerto Ricans will lose their ability to finance their utility and social welfare sectors, whilst the creditors would simply lose their investment. Both sides would then mire in endless court proceedings, hardly to benefit any of the parties involved.

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