Puerto Rico’s Bankruptcy Pits Wall Street Vs. the U.S. Government

Puerto Rico is out of money. And not just out of money, but in serious debt, owing $73 billion to many Wall Street companies after years of investment in the territory by Wall Street. What happens when a territory defaults? It’s not a country that can give away its assets — Puerto Rico is a U.S. territory and thus falls under U.S. law. And as the U.S. government is wont to do when big businesses are facing trouble, Congress is bailing out Puerto Rico with a special type of bankruptcy protection. Who is most affected by the news?

What’s Next for Puerto Rico?

How does a U.S. territory end up pitted against one of the world’s biggest financial institution? In the case of Puerto Rico, through bonds. For years, Puerto Rico offered high yield bonds which brought in hedge fund and mutual fund managers who viewed the territory as a safe bet due to tourism and being part of the U.S. economy.

Image via Visual Hunt

So what happened? Well, investors assumed that the island’s financial difficulties and economic issues would be solved at some point. Unfortunately, that’s not the case. Now, those bonds have come due, to the amount of $73 billion, and Puerto Rico just doesn’t have the money to pay up. To make it relative, the city of Detroit, which is in serious financial trouble, owes about $18 billion. Out of that $73 billion debt, about $12 billion is insured, meaning that debt falls on bond insurers who backed Puerto Rico bonds. Puerto Rico then has to pay the insurance companies back, adding them to the list of debtors waiting to be paid.

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Who are these other companies? Big Wall Street names including:

OppenheimerFunds
Franklin Templeton Investments
Aurelius Capital Management

Watch this video from Wochit News about Puerto Rico's bankruptcy:

What’s next? Puerto Rico goes into Title III court-supervised negotiations with the hedge funds to try and settle. But the fact is, that’s not going to amount to much. The government will push for debt restructuring and spending cuts, but the island is poorer than ever, with a dwindling population. The island will settle with Wall Street companies, who will then collect from the U.S. government and write down the rest for huge tax breaks. Puerto Rico will have to tighten its belt, but will survive with the help of the U.S. government’s protection and bailout.

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