Watch Rep. Luis Gutierrez School Congress on the History of Puerto Rico

Congressman Luis Gutiérrez dropped some serious knowledge on his colleagues this Tuesday about Puerto Rico’s debt crisis.

Speaking in the House Chamber, the Democratic Illinois Representative, who himself is of Puerto Rican descent, led his 5-minute talk with a lesson on the Caribbean island’s colonial status, saying, "it is [the U.S.’] colony, and we rule over it."

But Gutiérrez’s truth bombs didn’t stop there. The progressive politician, hailed as the Latino community's closest figure to Martin Luther King Jr., also blamed Congress for Puerto Rico’s $72B debt, which the island’s governor Alejandro García Padilla said wasunpayable last month.

"The Puerto Rican people must begin putting direct pressure on this Congress for action because Puerto Rico’s problems are mostly the creation of ... you guessed it ... Congress."

#toma

Here, five additional quote-worthy parts of Gutiérrez’s impassioned speech:

1. "Now the same people who cash in on debt in places like Greece and Argentina are lining up to cash in in the Caribbean by stepping up their demands for austerity measures, privatization of utilities and restructuring on their terms that will make them very, very rich at the expense of the Puerto Rican people."

2. "The Puerto Rican people are being distracted by the promises of Statehood by every politician who travels to San Juan or needs the votes of Puerto Ricans in Orlando."#JebBush

3. "Los dueños de bonos están haciendo fila para recibir sus pagos aun cuando el resto de Puerto Rico se derrumba." (The bondholders are lining up to get paid even if the rest of Puerto Rico collapses).

By Raquel Reichard

Watch Rep. Luis Gutierrez School Congress on the History of Puerto Rico

Puerto Rico Risking Point of No Return With Debt Payment Default

Puerto Rico is poised to set in motion a chain of events to force investors into negotiating a restructuring of the island’s $72 billion debt burden.

The commonwealth’s Public Finance Corp. will likely fail to make $58 million in bond payments due Aug. 1, the first default since Puerto Rico was ceded to the U.S. following the Spanish-American War. Government officials say they can’t make the payment because the legislature didn’t appropriate the funds last month for the current fiscal year.

A default would be the biggest salvo yet between creditors and the debt-ridden island since Governor Alejandro Garcia Padilla said in June that Puerto Rico cannot repay its obligations and was seeking to delay debt payments for a number of years. Prices of the securities are tumbling as officials, who are pursuing the use of bankruptcy, prepare to release a debt-restructuring plan by Sept. 1.

“They’re setting up the process of the entire restructuring,” said Lyle Fitterer, who helps oversee $38 billion of municipal securities, including Puerto Rico debt, at Wells Capital Management in Menomonee Falls, Wisconsin. “They’re probably getting advice from someone saying if you’re not going to pay on something, this is what you shouldn’t pay on.”

Moral Obligation

Investors appear to view a default as a sure thing. PFC bonds maturing in 2031 traded at a record low 11.9 cents on the dollar Monday, according to data compiled by Bloomberg. The debt changed hands Thursday at an average of 15.6 cents, for a yield of 36.3 percent.

“This is the first step to showing they’re not really interested in working with bondholders,” said Daniel Solender, who manages $17 billion as head of munis at Lord Abbett & Co. in Jersey City, New Jersey. “It is strange that they’re using a smaller issue to start the problems with bondholders. It’s the first real default if they really do it.”

The risk of default is spreading to other Puerto Rico securities, with subordinated sales-tax backed bonds known as Cofina debt trading at an average 37.1 cents Wednesday to yield about 45 percent.

While the PFC payment is small within the scope of the island’s debt load, it’s the credit with the weakest repayment pledge -- hinging on legislative appropriation. A dedicated revenue stream isn’t tied to the PFC’s $1 billion of outstanding bonds and the commonwealth isn’t obligated to pay off the securities, known as moral obligation debt.

Protest Rally

Some groups are pushing back against bondholders, particularly hedge funds that bought Puerto Rico securities at a discount and may profit from a restructuring.

About 40 people demonstrated outside of BlueMountain Capital Management’s offices Thursday in Manhattan carrying a hand-crafted vulture and carrying a banner that read: Hedge Funds = inequality. The group is against spending reductions that investors and island officials have called for, chanting in Spanish “Puerto Rico is not for sale. Puerto Rico defends itself.”

BlueMountain holds Puerto Rico Electric Power Authority debt and won a lawsuit this month that defeated an island law that would have allowed some agencies to ask investors to take a loss. The power utility should restructure its obligations for long-term solvency by modernizing its facilities, the New York-based firm said in a statement.

Payment Deadline

The Public Finance Corp. has until the end of business on Aug. 3 to make the payment since the first day of August is a Saturday, according to bond documents.

Puerto Rico and its agencies have more debt than any state except California and New York as the island and its localities borrowed to fix multi-year budget deficits. Its largest pension fund may deplete its assets by 2020, according to Moody’s Investors Service. That retirement plan only has 0.7 percent of assets to cover $30.2 billion of projected costs, according to financial documents. It’s the worst-funded among U.S. state retirement plans.

The commonwealth’s economy has declined every year but one since 2006. Its population has shrunk 7 percent in the last decade as people move to the mainland U.S. for jobs. The island’s 12.6 percent June unemployment rate is double the national average.

Available Cash

Other Puerto Rico debt payments due Aug. 1 include $91.5 million of principal and interest on Municipal Finance Agency bonds repaid with payments from San Juan and other towns, and also $252 million of principal and interest on debt backed by the island’s sales-tax levy.

Whether the PFC payment will be made will depend on if the commonwealth has cash available, Victor Suarez, the governor’s chief of staff, told reporters Monday in San Juan. He didn’t say whether the island will be able to do so.

At the same time, officials are working on addressing Government Development Bank bonds also due Aug. 1. The bank, which lends to the commonwealth and its localities, has $140 million of bonds maturing that day and $29 million of interest due, data compiled by Bloomberg show.

“We’re going to do everything possible so that the debt of the Government Development Bank is met,” Suarez said. “To that end, the bank is taking steps to increase its liquidity -- the bank’s liquidity, not the central government’s liquidity, to be clear -- to make this payment.”

Pressure Point

The GDB earlier this month said it may purchase its debt through cash or exchange the securities at less than par. Standard & Poor’s considers such an exchange as a default.

“The failure to pay any Aug. 1 debt service may also serve to pressure the U.S. Congress to more seriously consider extending Chapter 9” to Puerto Rico’s municipalities, Joe Deane, head of munis in New York for Pacific Investment Management Co., which oversees about $40 billion of state and local debt, wrote in a July 27 commentary on Pimco’s website.

A House bill that would enable some commonwealth agencies to file Chapter 9 has failed to gain Republican co-sponsors.

If PFC fails to pay on time, prices on commonwealth debt should fall, said Matt Fabian, a partner at Concord, Massachusetts-based Municipal Market Analytics.

“I would expect a knee-jerk reaction in Puerto Rico bonds because a lot of Puerto Rico bonds are still held in retail accounts on the expectation of full payment,” Fabian said.

Puerto Rico general obligations maturing July 2035 and originally sold at 93 cents on the dollar traded Thursday at an average 69.7 cents, for a yield of 12 percent, data compiled Bloomberg show.

“Everyone knows going in that it’s a possibility and that it’s on the low end of the spectrum,” Solender said about PFC’s potential to default. “But the expectation would be that they would try to work with bondholders before just walking away from the appropriation.”

by Michelle Kaske

Puerto Rico Risking Point of No Return With Debt Payment Default

Latino Leaders to Washington: Support Puerto Rico

In several cities across the nation today, Latino leaders and allies assembled to send a unified message to President Obama and Congress: Support Puerto Rico and its 3.5 million U.S. Citizens. As Puerto Rico continues to endure a growing economic crisis that includes a $73 billion debt, major unemployment and population drain, Puerto Ricans and Latinos on the mainland are growing impatient with Washington as leaders have failed to step up to assist millions of American citizens living on the island.



 

As local leaders gathered at New York’s City Hall today, similar events were held in the nation’s capital and in Orlando, where the Puerto Rican population has skyrocketed in recent years and has become an increasingly powerful voting bloc in the key swing state of Florida. New York is home to over 1 million Puerto Ricans and 3.5 million Latinos, many of whom are also watching closely to see how government leaders and Presidential candidates respond to the growing economic crisis on the island.

To bring more urgency and attention to the crisis, leaders outlined specific solutions the federal government should enact including investing federal funds on the island for health, energy and other needs, facilitating a fair debt repayment and relief plan, eliminating economically-handicapping policies like the well-documented, costly Jones Act shipping requirements, and granting bankruptcy protection for the island, for which Puerto Rico is currently not allowed to pursue.

To help Puerto Rico address its current crisis, Latino leaders from across the country are calling for the federal government to take the following actions:

• President Obama must commit to a federal investment plan that addresses underlying fiscal issues and grows the economy with good-paying jobs including Medicaid/health care investments, clean energy development, and cleaning up Vieques & Culebra
• Congress must eliminate federal policies that put the island at an economic disadvantage including amending the Jones Act costly shipping requirements
• Congress must pass legislation to grant Puerto Rico a Chapter 9 Bankruptcy option
• President Obama must convene his Working Group on Financial Markets to bring all parties to the table to negotiate a fair debt repayment and relief deal and explore a Federal Reserve loan
• President Obama and Congress should oppose severe austerity and wage reduction proposals like the Krueger Plan that would hurt poor and working families

“In New York City, we have the largest Puerto Rican community outside of Puerto Rico, and that means we have a special obligation to speak out. We cannot isolate Puerto Rico as it faces these serious challenges and risks – not just because we’ll feel the impacts here on the mainland, but because we as a nation act when our fellow citizens are in need. I’m proud to join with this coalition of leaders to tell Washington: act now for Puerto Rico and its people,” said New York City Mayor Bill de Blasio. 
“It is very disheartening that the U.S government is turning a blind eye toward the grave situation in Puerto Rico. The Obama administration and the Congress cannot continue to ignore this crisis. Let’s be clear: austerity is not the solution. The solution to this crisis cannot be at the expense of the working class and the most vulnerable. The federal government needs to step up and assist the Puerto Rican people at this moment of need. It’s their responsibility as well,” said New York City Council Speaker Melissa Mark-Viverito. 

“To deny Puerto Rico a helping hand during this crisis is to deny American citizens the economic safety net they need and should have a right to. We urge Washington to act immediately to address this situation, taking our recommendations into consideration. They cannot continue to ignore the needs of the island, abandoning millions of citizens, and then turn around to ask for the Latino vote,” said José Calderón, President of Hispanic Federation.

“I am proud to join this coalition, to send the President of the United States and Congress a clear message: Puerto Rico and its residents deserve immediate attention and action that address the drastic financial crisis impacting the Island. As a U.S. territory, as U.S. Citizens and as one of the communities that has most sacrificed and given towards the growth and success of our nation, it is imperative that these outlined steps be taken. Puerto Ricans on the Island and those around the US, our friends and supporters will not cease our fight until this situation is resolved,” said NYS Assemblyman Marcos Crespo, Chair of the NYS Puerto Rican/Hispanic Task Force.

“Puerto Rico is an integral part of the American and New York family, and we cannot let the island be crippled by debt. Washington must step up and make the financial stability of Puerto Rico a priority. Millions of American citizens live on the island, and we must stand up and protect them,” said Letitia James, NYC Public Advocate.

“It is time America took stock of how it responds to the poorest of its citizens. Unlike the citizens of Detroit, U.S. Citizens of Puerto Rico are treated to 'unequal protection' under U.S. law. Shamefully, beyond "Jim Crow", Puerto Rico is America's mortal sin,” said Luis Garden Acosta, Founder & President of El Puente.

“We cannot stand idly by while 3.5 million Americans suffer through a crisis that continues to decimate the socio-economic fabric of Puerto Rico. The President and Congress have a responsibility to the U.S. citizens that reside in Puerto Rico to address the severe financial situation that the island is currently facing. We will continue to demand that the federal government take action until a rightful solution to this dire situation is implemented,” said NYS Senator Gustavo Rivera.

“Puerto Rico’s $73 billion public debt crisis has been imposed on 3.5 million people on the island, but it must not be paid off at the expense of its working people. We demand that the federal government step in immediately to conduct a public audit of the debt, consider allowing a bankruptcy mechanism for the island, prevent vulture funds from further profiting and put a stop on austerity measures that are harming families on the island,” stated Hector Figueroa, President of 32BJ SEIU. 

"Hay muchos factores que llevaron a este punto y hay culpa para repartir. Lo que ha resultado de todo esto es la extrema pobreza y la emigración masiva en la última década. Si mi isla no recibe apoyo del gobierno federal, tendrá que negociar un acuerdo con sus acreedores en un vacío caótico. Lo que sé es que esos jugadores fiscales están buscando extraordinaria riqueza y poder - a expensas de todos los demás. Mi isla no puede y no debe ser el unico responsable de la deuda $72 mil millones,” said Maria Cortes, Member of Make the Road New York.

“With the second largest population of Puerto Ricans on the mainland, we in Orlando are committed to standing unified in the face of a worsening economic crisis in Puerto Rico. While there is no one step to be taken that will solve this crisis immediately and for the long-term, we must help the American citizens on the island of Puerto Rico. We urge Congress and President Obama to take action on one or several of our suggestions in order to ensure that this never happens again,” stated Zoé Colón, Director of Florida and Southeast Operations of the Hispanic Federation.

“It is critical for our Federal Government to step up and help Puerto Rico by amending our bankruptcy laws, making them eligible for grants available to the states and stopping the cuts to Medicare,” stated Florida State Senator Darren Soto.

"Today Puerto Rico is on the verge of fiscal default. The Federal Government has a legal and constitutional obligation to help resolve this financial crisis. Close to a million Puerto Ricans living in the State of Florida do care and demand action from President Obama and Congress now,” stated Betsy Franceschini, Regional Office Director of the Puerto Rico Federal Affairs Administration.

“Puerto Ricans are American citizens and are entitled to the fundamental rights that citizenship entails. Failure to provide Puerto Rico with the same rights that all Americans enjoy is a fundamental flaw in our system. Puerto Rico has had over 100 years of being treated as citizens of a different Class. Continued denial of basic constitutional rights is an affront to our principals of justice and equality as stated in our jurisprudence. As our president travels the world espousing American ideals and principals we need to look inward to insure that these same principals are applied at home,” stated Anthony Suarez, Esq., President of the Puerto Rican Bar Association of Florida.

“During this difficult economic crisis, LatinoJustice PRLDEF stands with Puerto Rico. We urge Congress to reform the stifling federal policies that not only prevent Puerto Rico from flourishing economically but have also contributed to its dire financial situation,” stated Martha Pardo, Associate Counsel – Southeast Regional Office of LatinoJustice PRLDEF.

“It is time for Congress and the President to stand up and do their duty to support our fellow Americans by giving Puerto Rico the tools to resolve its debt crisis, including the same tools available to other jurisdictions of the United States,” said Hector Sanchez, NHLA Chair and Executive Director of the Labor Council for Latin American Advancement.

Rep. Nydia M. Velázquez (D-NY) stated, “Puerto Rico’s fiscal problems are unprecedented and require bold, immediate action. Not only are Puerto Ricans suffering from this crisis, but should the situation continue deteriorating, there could be wide-ranging consequences for the broader American economy. All Puerto Ricans are speaking with one voice in calling on the federal government to address these challenges swiftly.”

“As a U.S. territory, the Puerto Rican economy is intimately linked to the mainland’s economy. Congress and the federal government can’t afford to ignore this issue and the needs of the millions of Puerto Ricans that live on the island and the rest of the United States. What we are asking for is equality for Puerto Rico so that it can have the rights, tools, and financial resources it needs to successfully address the economic crisis. Our message is simple and straightforward: Congress and the United States government has to act,” said Congressman José E. Serrano.

“Puerto Rico has been in a recession longer than any state of union and its ability to tackle those economic woes is hampered by its unequal treatment in Congress. Congress and The White House have the fiscal and moral responsibility to provide the tools to help stabilize and kickstart the Puerto Rican economy,” said Rafael A. Fantauzzi President and CEO of the National Puerto Rican Coalition. “It is unacceptable that we are more worried about the financial burdens of other countries and continue to ignore the 3.5 million proud Americans that live in American soil.”

“I want to thank the NHLA, and the coalition of Latino organizations that are its backbone, for urging the President and Congress to empower the U.S. jurisdiction of Puerto Rico to address its economic crisis. I am particularly grateful that the NHLA has endorsed my legislative efforts to authorize Puerto Rico to permit its public enterprises to seek relief under Chapter 9 of the federal bankruptcy code; to provide more equitable treatment to Puerto Rico under federal health programs like Medicaid and Medicare; and to increase the number of maritime vessels that would be able to transport energy supplies, agricultural products and other bulk cargo between ports in Puerto Rico and other U.S. ports,” said Pedro Pierluisi, Puerto Rico’s sole representative in Congress.

“It is vital that Congress take action to prevent a humanitarian and financial catastrophe in Puerto Rico,” said U.S. Senator Richard Blumenthal (D-Conn) “This is a clearly avoidable disaster that will harm creditors, investors and ordinary citizens if Congress fails to act. My bill with Senator Schumer, The Puerto Rico Chapter 9 Uniformity Act, would enable an orderly, rational restructuring of Puerto Rico’s debt, instead of a financial free for all and potential free fall, and I urge my colleagues on both sides of the aisle to accept this common-sense measure.”

“Puerto Rico is part of the United States and its residents have fought valiantly in every war since World War I,” said Juan Cartagena, President and General Counsel, LatinoJustice PRLDEF. "We give tax breaks to hedge funds while asking Puerto Rican residents to live a more austere life. Further deterioration of the island’s economy will only exacerbate a growing migration from the island and will further increase state and federal costs as a result. Therefore, inaction is not an option.”

“What is happening to our brothers and sisters in Puerto Rico is of great concern to Latinos and other Americans across the country. We ask the Administration and the Congress to make relief for the island a priority now,” stated Janet Murguia, President and CEO, NCLR.

Latino Leaders to Washington: Support Puerto Rico

Sack Puerto Rico's teachers? A new low for hedge funds - Business Analysis & Features

They have fought long-running legal battles with Argentina, Peru and Zambia, and now want Puerto Rico to sack teachers and close down schools to pay back debt. It’s fair to say that vulture funds are the scourge of impoverished countries, seemingly hell-bent on exploiting economic weakness across the globe.

The ruthless investment vehicles can trace their roots back to the 1990s, when the US hedge fund pioneer Paul Singer began buying up the debt of crippled countries and companies for small sums,  before taking them to court to demand 100 per cent repayment of the debt, on top of interest and court costs.

Having incurred the wrath of politicians and debt-forgiveness NGOs since then, the aptly named vulture funds are at it once again, calling for Puerto Rico to take dramatic action to help them recover some of the $72bn (£46.4bn) in debt the country owes.

The latest battle has pitted the small Caribbean nation against a group of 38 distressed-debt specialists which include the New York-based Fir Tree Partners, Davidson Kempner Capital Management and Aurelius Capital, collectively known as the Ad Hoc Group of Puerto Rico and holding an estimated $5.2bn worth of the country’s bonds. This group has hired three former International Monetary Fund economists – Jose Fajgenbaum, Jorge Guzman and Claudio Loser – to write a report released this week entitled “For Puerto Rico, there is a better way”. In this, the economists claim the country should raise taxes, cut health benefits and sack teachers to shrink the size of the state, rather than default and leave bondholders (that is, the Ad Hoc Group) out of pocket.

Hedge funds and other distressed-debt buyers now hold almost a third of the island’s securities, according to Barclays Capital, with Puerto Rico having courted investors with tax breaks.

So what next for the US territory, discovered by Christopher Columbus in 1493 and which counts the singer Ricky Martin and actor Benicio del Toro among its own?

Dubbed the “Singapore of the Caribbean” last year by the billionaire hedge-fund manager John Paulson, the country has been ravaged by an eight-year recession that has left it on the verge of a defaulting on a $58m payment to its bondholders on 1 August.

Earlier this week, a Puerto Rican government official raised the spectre of the country failing to meet this repayment. Victor Suarez, the chief of staff for Puerto Rican Governor Alejandro Garcia Padilla, said: “The simple fact remains that extreme austerity [alone] is not a viable solution for an economy already on its knees.”

According to reports, Puerto Rico’s current education spending works out at $8,400 per student, below the US national average of $10,667. Mr Padilla said in June that Puerto Rico was unable to pay its debts and that creditors must be willing to negotiate to avoid “shooting themselves in the foot”.

The current situation has Washington worried, with the US Treasury Secretary, Jack Lew, called for Congress to amend its bankruptcy laws to help Puerto Rico restructure its debts. Puerto Rico cannot legally declare itself bankrupt because it is a US commonwealth territory.

“The continued deterioration of Puerto Rico’s economic and financial conditions has the potential to further harm retiree investment portfolios across the country,” Mr Lew wrote this week to Senator Orrin Hatch, who chairs the powerful Senate Finance Committee. “A significant portion of Puerto Rico’s debt is still held directly by individual retail investors or indirectly through the municipal bond funds they own.”

The country’s economic plight has sparked demonstrations in cities across the US, including New York where an estimated one million Puerto Ricans live.

“It is very disheartening that the US government is turning a blind eye toward the grave situation in Puerto Rico,” City Council Speaker Melissa Mark-Viverito, who was born and raised in San Juan told Bloomberg. Hedge funds, she said, “are vultures, are feeding off the misery of the island and the people, and it’s really dire”.

New York Mayor Bill de Blasio has even called for the federal government to allow Puerto Rican agencies to file for bankruptcy protection. He said the government should also help companies and individuals to invest in the island of 3.5 million people.

Ahead of this weekend’s repayment deadline, it remains to be seen whether Puerto Rico will be set on the road to recovery or whether it will remain hostage to some of the most brutal investors the world has ever seen.

Hard-headed: The vulture funds

Aurelius Capital Founded by the billionaire hedge fund manager Mark Brodsky. It was involved in the legal spat with the Argentinian government which tipped it back into default last year, as well as Co-op Bank’s debt restructuring.

Fir Tree Partners Jeffrey Tannenbaum’s firm was involved in a spat with the car hire firm Hertz last year in which it claimed the company’s boss Mark Frissora had “completely lost credibility”. Mr Frissora stood down a month later.

Davidson Kempner Capital Has about $25.4bn under management and has boosted its fortunes by investing in the distressed debt of Lehman Brothers as well as Greek bonds as well as US and European mortgage-backed securities.

As the Caribbean island struggles to service a debt mountain, its creditors are demanding drastic measures that would impoverish it even more

Sack Puerto Rico's teachers? A new low for hedge funds - Business Analysis & Features

U.S. Investigates Ex-UBS Puerto Rico Adviser Over Loans for Debt Funds

ZURICH—UBS Group AG has confirmed a U.S. Justice Department criminal probe of an unnamed former employee in Puerto Rico, and disclosed a pair of related investigations by other regulators, adding new twists to the Swiss bank’s legal drama in the commonwealth.

The former UBS employee is José Ramirez, a financial adviser who was fired last year, according to a person familiar with the matter. Mr. Ramirez, sometimes known by the nickname the “Whopper,” has previously been the target of civil claims that he advised clients to take loans from UBS to buy funds from the bank underpinned by Puerto Rico debt securities that lost value, despite the terms of the loans barring their use to purchase securities.

In a filing on Tuesday, Zurich-based UBS confirmed the Justice Department’s inquiry, and also disclosed for the first time that the Financial Industry Regulatory Authority, or Finra, and the Securities and Exchange Commission have made related information requests about clients’ use of loans to buy the UBS funds.

UBS said it is cooperating with the investigations.

An attorney representing Mr. Ramirez said in a statement that any suggestion about the specific targets of the Justice Department inquiry would be “sheer speculation.”

“Business and personal reputations are precious,” the attorney, Guillermo Ramos-Luiña said. “Mr. Ramirez and I are not going to make comments that could tarnish anyone’s reputation.”

A spokeswoman for the U.S. Attorney’s Office in Puerto Rico declined to comment.

UBS customers have previously filed civil claims against UBS and Mr. Ramirez, alleging that they have lost significant amounts of their savings after being advised to borrow money to buy the bond funds. According to Mr. Ramirez’s record as a broker with Finra, he received a so-called Wells notice from the SEC in March, notifying him that the regulator was considering civil charges that he had violated parts of the Exchange Act and the Securities Act.

A separate customer dispute in the Finra record notes that a client alleged that in 2013 he gave Mr. Ramirez $250,000 to pay down a loan, which was then instead used to purchase more funds. The record indicates that this complaint was denied.

Mr. Ramirez’s attorney declined to comment on Mr. Ramirez’s Finra record.

Puerto Rico has emerged as the source of significant legal trouble for UBS. Its problems there began in 2013, with a decline in the value of bonds issued by the financially troubled commonwealth. That led to a wave of complaints from customers who had purchased funds that included the debt, and now to a number of regulatory probes.

According to UBS, the information requests from the SEC and Finra have related to clients’ use of loans to invest in the Puerto Rico bond funds, and to “supervision issues.”

The Justice Department’s criminal inquiry is focused on “the practice of certain customers and a UBS financial adviser of using non-purpose loans to invest in closed-end fund securities in violation of their loan agreements,” the bank said in its Tuesday filing.

Complaints and arbitrations stemming from its issues in Puerto Rico have led to claimed damages that now amount to more than $1.1 billion, UBS said in the filing.

Last month, Puerto Rico Gov. Alejandro Garcia Padilla said the commonwealth would have to delay payments to bondholders for “a number of years.” That, UBS said in the filing, may only increase the number of claims filed against the bank.

Write to John Letzing at john.letzing@wsj.com

By John LEZING

UBS customers have filed civil claims against UBS and the former adviser over losses

U.S. Investigates Ex-UBS Puerto Rico Adviser Over Loans for Debt Funds

Puerto Rico's Muni-Bond Meltdown Likely Won't Burn Everyone [Video]

Puerto Rico's Muni-Bond Meltdown Likely Won't Burn Everyone

Jeb Bush is Declaring His Support for Puerto Rico's Statehood

Speaking of the Holy One, Bush took a trip to my home church, Centro Internacional de la Familia, in East Orlando to make his big announcement.

"My belief is that Puerto Ricans should have a right to self-determination ... I have long been a supporter of statehood," Bush said. "I believe that full citizenship and all the rights and responsibilities that go along with full citizenship is the proper place."

Sounds nice, right?

Except that, with deeper inspection, it’s really not.

For starters, Bush went on to say that Puerto Rico needs to solve its economic woes, which was created in large part because of the U.S., in order for the mainland to consider statehood. Congress, however, hasn’t gotten the memo, as it has repeatedly shown a lack of interest in the topic, making Bush’s talk seem more like empty promises.

Even more, Puerto Ricans overwhelmingly don’t want to be the 51st state.

Since the U.S. first colonized the Caribbean island in 1898, Puerto Ricans have held referendums to voice their thoughts on the island's political status. Since then, islanders have repeatedly voted against statehood.

In 2012's two-part status referendum, statehood received the largest share of votes it has ever had. But, as the Huffington Post pointed out then, that doesn’t mean it was the majority vote, despite how mainstream media spun the news.

The 2012 referendum consisted of two questions. The first one asked voters if they wanted to keep their current U.S. commonwealth status. Fifty-two percent of voters said no. The second question then asked if voters wanted to become a U.S. state, an independent country or a freely associated state. Sixty-one percent of those who answered the second question chose statehood.

While that, at first glance, seems like a majority, it’s really not.  That’s because most Puerto Ricans – 470,000, or 65 percent – intentionally did not respond to the final question. In fact, only 45 percent of those casting ballots in 2012 supported statehood.

Furthermore, that same year, Puerto Ricans expressed their anti-statehood views in another way: by voting pro-statehood governor Luis Fortuño out of office.

Bush is serving up Puerto Ricans the same load of BS he’s been offering DREAMers for a while, a group he says he supports, though his policies and condescending interactions with DREAMers share otherwise.

PLUS: Jeb Bush's 'Pro-Latino' Stance Questioned When DREAMer Asks About DACA

Though throwing around Spanish phrases and parading his Mexican wife and half-Latino children around as political props, Bush’s anti-DACA policies, out-of-touch views and patronizing remarks prove to be anything but pro-Latino, again.

Corbis

Republican presidential candidate Jeb Bush is using his Spanish-speaking skills to appeal to the Latino community again, this time taking to my hometown in Orlando, Fla. to tell its large Puerto Rican population that he wants statehood for the island.

By Raquel Reichard

Jeb Bush is Declaring His Support for Puerto Rico's Statehood

For Puerto Rico, Prosperity Requires Equality

The press has turned its attention to Puerto Rico in the wake of the recent claim, made by the island's governor, that Puerto Rico cannot pay all of its $72 billion in outstanding debts. Much of the analysis is simplistic and superficial. This is unfortunate, because skewed media coverage can cause policymakers and members of the American public -- some of whom are being introduced to the subject of Puerto Rico for the first time -- to draw erroneous conclusions.

To properly assess the situation, one should ask and answer three questions. First, what, exactly, is Puerto Rico? Second, what are the main causes of the economic crisis in Puerto Rico? And third, what steps should be taken, in both Washington, D.C. and San Juan, to empower Puerto Rico to manage this crisis and, ultimately, to prosper?

Puerto Rico is a territory of the United States. This is not a unique or special political status; it is the same status that four other smaller U.S. jurisdictions have, namely the United States Virgin Islands, Guam, the Northern Mariana Islands, and American Samoa. Puerto Rico is not a sovereign nation. Nor is Puerto Rico a "commonwealth," a word that is frequently used by the press but one that is devoid of meaning.

Puerto Rico's 3.5 million residents are American citizens who carry U.S. passports and can move to the states for the price of a one-way plane ticket. Indeed, over 4,000 of my constituents are now exercising this right every month. Island residents have served in the American military in large numbers since World War I. Nine service members from Puerto Rico have won the Medal of Honor. A mostly Puerto Rican unit of the U.S. Army, the 65th Infantry Regiment, was recently awarded the Congressional Gold Medal for its combat performance in the Korean War.

Under the U.S. Constitution, the federal government has nearly absolute power over its territories. Over the years, Congress has delegated to Puerto Rico about the same authority over local matters that the states possess under our system of federalism. For example, in the 1950s, Congress authorized Puerto Rico to draft a state-like constitution and then approved that constitution. Like the states, Puerto Rico has three branches of local government -- a popularly-elected governor, a bicameral legislature, and a judiciary. Every federal agency has a presence in Puerto Rico. Federal law is supreme in Puerto Rico, interpreted by federal judges nominated by the president, confirmed by the Senate, and enjoying lifetime tenure.

Accordingly, if you see an article describing Puerto Rico as an "island nation" or "a Caribbean country" -- perhaps you ought to stop reading. The reality is that the economic challenges that Puerto Rico confronts are as "American" as those faced by California in the early 2000s or by Detroit in 2013.

Puerto Rico is essentially a U.S. state, with two critical differences. My constituents cannot vote for president (although they do participate in presidential primaries), have no U.S. senators, and have one delegate in the U.S. House of Representatives, a position I have held since 2009. I can introduce bills and vote on the committees to which I have been assigned, but I cannot vote on the floor. Puerto Rico thus lacks the most fundamental feature of American political life: democracy.

In addition, Puerto Rico is denied equality. As a territory, it can be -- and often is -- treated worse than the states under federal spending and tax credit programs. I enumerated some of the more egregious disparities in a recent op-ed in The New York Times. Puerto Rico is deprived of billions of dollars annually -- money that could be flowing through our local economy -- as a result of this unequal treatment.

If you genuinely want to understand why Puerto Rico is mired in a crisis, but you disregard or downplay the lack of political and civil rights in the territory, then you are missing a core point. As a result of mismanagement by territory officials, Puerto Rico's problems have grown worse in recent years (and therefore attracted more media attention), but it is important to underscore that these problems are longstanding and structural in nature.

If you look back 10, 20, 30 or 40 years, you will see that Puerto Rico has invariably lagged far behind the states (and states, not foreign nations, are the appropriate point of comparison for a U.S. territory) based on every economic metric, including unemployment, poverty rate and average household income. Puerto Rico has a debt problem because our government has over-borrowed, and the main reason our government has over-borrowed is to compensate for the lack of federal economic support. In this sense, inequality has bred irresponsibility.

Both of these factors -- lack of equal treatment at the federal level and lack of discipline at the local level -- must be addressed if Puerto Rico is to achieve economic growth and stem the outflow of island residents to the states. Given my current role as Puerto Rico's representative in Washington, let me briefly focus on the reforms that should be made at the federal level to assist Puerto Rico.

I am a strong supporter of statehood for the territory, which is the only way to guarantee full equality for my constituents. In 2012, the government of Puerto Rico held a referendum in which voters expressed opposition to remaining a territory and expressed a preference for statehood. The federal government responded by enacting legislation to enable Puerto Rico to hold the first federally-sponsored vote in history, so we can finally resolve this issue. I expect that this vote will occur in 2017, that voters will reaffirm their desire for statehood, and that Puerto Rico will petition Congress to enact a law admitting Puerto Rico into the Union.

Until Puerto Rico becomes a state, as I am optimistic it will, there is no reason why Congress and the President should not take meaningful steps to improve the territory's treatment under federal programs, including health programs like Medicaid and Medicare, programs like the Earned Income Tax Credit that encourage work in the formal sector, and other social safety-net programs that currently exclude or shortchange Puerto Rico. Congress should also enact my legislation to empower the Puerto Rico government to authorize its insolvent municipalities, specifically its public corporations, to seek relief under Chapter 9 of the federal bankruptcy code, a power that Congress has granted to all state governments.

In general, proposals designed to narrow the gap between Puerto Rico and the states should be embraced, while proposals that seek "special" treatment for Puerto Rico should be viewed with skepticism. Too often, efforts to provide Puerto Rico with different treatment, even if well-intentioned, ultimately harm rather than help the territory. The American citizens of Puerto Rico seek and deserve equality, nothing less and nothing more.



Rep. Pedro R. Pierluisi, a Democrat, is Puerto Rico's delegate in Congress.

For Puerto Rico, Prosperity Requires Equality

U.S. regulators approve offshore gas project in Puerto Rico

The Federal Energy Regulatory Commission, or FERC, has authorized the development of the Aguirre Offshore GasPort, a floating terminal that will process liquefied natural gas for use in generating electricity in Puerto Rico.

The Woodlands, Texas-based Excelerate Energy, which is developing the project, said the FERC's decision confirmed that the floating terminal posed "no significant environmental impact."

The project is part of an effort to reduce Puerto Rico's high energy costs, a factor that local companies say has had a negative impact on the economy.

"We are pleased to receive the order from FERC after nearly four years of extensive environmental review," Excelerate CEO Rob Bryngelson said in a statement.

Excelerate Energy will supply LNG via the Aguirre Offshore GasPort to the Central Aguirre Power Complex belonging to the Puerto Rico Electric Power Authority, or PREPA.

"During this time, Excelerate has not diminished its efforts to deliver the beneficial Aguirre Offshore project, nor has the company wavered in its support for PREPA and the government of Puerto Rico," Bryngelson said.

Construction of the floating terminal is slated to start during the first quarter of 2016, with the project expected to begin operating in the second quarter of 2017.

PREPA, a public corporation founded in 1941, supplies 99 percent of the power consumed in Puerto Rico.

Excelerate, a leading supplier of LNG solutions, has operations in Buenos Aires, Dubai, London, Rio de Janeiro and Singapore. EFE

U.S. regulators approve offshore gas project in Puerto Rico

Pimco Drawn to Tobacco Bonds for Yield Fix as Puerto Rico Twists

As Puerto Rico veers toward a historic default, investors who need a high-yield fix are turning to tobacco instead.

Pacific Investment Management Co. and AllianceBernstein Holding LP, which shed all holdings of the commonwealth’s debt, have been buying securities backed by the cash states get from the 1998 legal settlement with tobacco makers. While Moody’s Investors Service predicts 80 percent of the bonds may default as a drop in smoking cuts those payouts, the firms say the endgame is predictable, unlike the Caribbean island’s: The interest would keeping coming until the debt is paid.

Tobacco bonds have returned 2.1 percent in July as prices rallied, triple the municipal market’s gain, according to Barclays Plc data. Some still yield more than 7 percent, a level rarely found on tax-exempt bonds outside of Puerto Rico.

“In a world where everyone wants income, 7 percent looks OK and tobacco’s risks are known,” said Guy Davidson, who oversees $32 billion as director of municipal fixed income at AllianceBernstein in New York. Four of the top 10 holdings in the company’s high-yield muni fund are tobacco securities, including those sold by Ohio.

Ohio tobacco bonds due in June 2047 traded Tuesday for an average of 81 cents on the dollar, the highest since June 17, to yield 7.5 percent.

Shifting Risk

The $34 billion in tobacco securities outstanding are financed with payments companies make under the legal settlement, which are based on how many cigarettes they sell. State and local governments issued the debt to get the cash upfront, shifting the risk to investors if the payments fall short of expectations.

They’ve been a mainstay of the high-yield muni funds that have poured money into Puerto Rico. That’s fostered speculation tobacco bonds could tumble if a default by the commonwealth on some of its $72 billion of debt leads investors to pull their money from the funds, which would force managers to sell investments to meet withdrawals.

So far, tobacco bonds have weathered the crisis. While individuals yanked money from high-yield funds in the days after Governor Alejandro Garcia Padilla said the island can’t afford its debt, the outflows have abated. High-yield funds pulled in $11 million in the past two weeks, Lipper US Fund Flows data show.

Opportunity Ahead?

Peter Hayes, who helps oversee $116 billion as head of municipal debt at New York-based BlackRock Inc., the world’s biggest money manager, said that doesn’t mean the risk has subsided. The commonwealth may miss a payment on Public Finance Corp. bonds due Aug. 1 and is scheduled to propose a debt-restructuring plan a month later.

“That could be a catalyst for another leg down on some of the Puerto Rico bonds -- and if we see some additional selling, we might see spillover into the high-yield muni market, like tobacco,” Hayes said. “There might be other buying opportunities ahead.”

The yields on tobacco bonds reflect the risk. The earliest securities didn’t anticipate how quickly smoking rates would fall. In the seven years through 2006, shipments dropped an average of 1.7 percent a year, according to data from the National Association of Attorneys General. The pace of decline almost tripled in the next seven years.

Default Risk

That’s left four out of five bonds prone to default, according to Moody’s.

That prospect doesn’t bother David Hammer, a money manager at Pimco. Though the bonds may not make full principal payments when they’re due, investors will be paid back eventually as long as cigarette shipments don’t vanish entirely, he said.

By comparison, Moody’s estimates that some owners of Puerto Rico securities may receive as little as 35 percent of what they’re owed.

“The difference in tobacco is because you have a claim on those revenues in perpetuity, you’re talking about the extension of the payment schedule as opposed to an actual principal haircut,” said Hammer, who helps oversee $40 billion of munis for Pimco in New York.

The yields have so far been sufficient to draw buyers, said Davidson of AllianceBernstein.

“While we’re all very cautious about the Puerto Rico contagion effect and having a run on muni high-yield, at these levels there seems to be support,” he said. “For tobacco, it’s steady as she goes, it offers a nice yield, and the contagion to Puerto Rico seems to be pretty modest.”

A worker harvests tobacco at a farm in Vinales, Cuba.

Photographer: Dado Galdieri/Bloomberg

by Brian Chappatta

Pimco Drawn to Tobacco Bonds for Yield Fix as Puerto Rico Twists

Puerto Rico s Planned Balanced Budget Ends $703 Million in the Red

Puerto Rico wound up with a $703 million deficit in 2015, a fiscal year it had budgeted to be at least superficially balanced, according to Puerto Rico Secretary of the Treasury Juan Zaragoza Gómez.

by Robert Slavin

Puerto Rico s Planned Balanced Budget Ends $703 Million in the Red

UBS says legal reserves stand at $2.5 bln, details Puerto Rico probes

UBS said its provisions to deal with future legal tussles and regulatory run-ins stood at 2.368 billion Swiss francs ($2.46 billion) in June and revealed a widening U.S. probe into bond funds sold by the Swiss bank's Puerto Rico arm.

Zurich-based UBS' current legal reserves were disclosed in its second-quarter report on Tuesday, which came one day after its results.



The bank said it is responding to inquiries from the Securities and Exchange Commission and the Financial Industry Regulatory Authority (FINRA) over the practice by some of its customers and one bank adviser of using loans to invest in closed-end funds in Puerto Rico.



"We also understand that the Department of Justice is conducting a criminal inquiry into the practice of certain customers and a UBS financial advisor of using non-purpose loans to invest in closed end fund securities in violation of their loan agreements and UBS policies," the bank said.



The bank said it is cooperating in the investigations. ($1 = 0.9623 Swiss francs) (Reporting by Katharina Bart; Editing by Muralikumar Anantharaman)

UBS says legal reserves stand at $2.5 bln, details Puerto Rico probes

College, Puerto Rico test OppenheimerFunds' bond strategy

OppenheimerFunds Inc., which owns more Puerto Rican bonds than any other mutual-fund company, will be among the hardest hit if the island lapses into a default on some of its $72 billion of debt.

The New York-based company, which manages $24 billion in state and local government debt, has a stake in another noteworthy, if smaller-scale, case of municipal-market distress.

OppenheimerFunds holds about $21 million, or 46 percent, of the debt sold by Dowling College in Oakdale, N.Y. The 2,000-student school is the first municipal borrower rated by Moody's Investors Service to default since 2013, ending the longest stretch without such a lapse in almost two decades.

The dual risk illustrates the company's long-held strategy of putting cash into the most precarious corners of the $3.6 trillion municipal market to capture higher yields. Over the years, its funds have invested in airline-backed debt, tobacco bonds and real-estate development deals roiled by the housing-market crash.

"The basic high-yield strategy is built to survive a handful of defaults," said Matt Fabian, a partner at Municipal Market Analytics, a Concord, Mass.-based research firm. "In return, they're compensated by a much higher stream of income."

The tactic has delivered annualized returns of almost 5 percent over the past five years to the firm's AMT-Free New York Municipal Fund, outperforming 96 percent of its peers, Bloomberg data show. It's the fund with the largest stake in Dowling. Ray Pellecchia, an OppenheimerFunds spokesman, declined to comment on the company's investment in the college.

Yet such high-yield bonds, especially those from Puerto Rico, have made the funds prone to short-term swings.

Over the past month, the New York fund has trailed 97 percent of peers, Bloomberg data show. That came after Puerto Rican Gov. Alejandro Garcia Padilla said he'd seek to restructure the island's debt, which caused bond prices to tumble. OppenheimerFunds owns more than $4 billion of uninsured island securities, Bloomberg data show.

The stakes are lower with Dowling College. Like Puerto Rico, its strains are years in the making. Moody's has rated the school below investment grade since 1997. In March 2014, as enrollment fell by almost half in five years, Moody's dropped the college to "Ca," the second-worst rank, citing a "higher probability of default."

Dowling didn't have the money needed to make bond payments due June 1, according to disclosure filings. Bondholders agreed to give the school until June 30, 2016, to sort out its finances without going after it for the money they're owed. Pellecchia, the OppenheimerFunds spokesman, said the firm is part of the creditors group.

The college doesn't expect to pay bondholders as long as the agreement is in place, according to the filing.

OppenheimerFunds owns municipal debt the school issued in 1996, 2002 and 2006 through agencies of Suffolk County, N.Y., and Brookhaven, a town within the county.

Some of the 1996 bonds, which are uninsured and mature in five years, changed hands July 16 at 82 cents on the dollar for an 11 percent yield. The 2006 securities are insured against default by ACA Financial Guaranty Corp.

In connection with the agreement with Dowling, some bondholders bought $6.7 million of taxable debt to provide the college with needed cash, according to the disclosure filings.

The pact may be a good thing for OppenheimerFunds and other investors. Moody's said the odds of recouping losses are now "modestly improved" because the school has breathing room to implement its strategic plan.

Ralph Cerullo, the college's chief financial officer, didn't return a voice mail left at his office seeking comment.

Business on 07/28/2015

Print Headline: College, Puerto Rico test OppenheimerFunds' bond strategy

By Brian Chappatta

College, Puerto Rico test OppenheimerFunds' bond strategy

Puerto Rico Lacks Cash for Aug. Bond Payment, Official Says

 Puerto Rico currently lacks the funds needed to make a payment due next month on bonds sold by its Public Finance Corp., a government official said.

Victor Suarez, the chief of staff for Governor Alejandro Garcia Padilla, told reporters Monday in San Juan that whether the payment is made will depend on if the commonwealth has cash available. He didn’t say whether the island will be able to do so. The commonwealth is also working on a short-term borrowing backed by oil-tax revenue, Suarez said.

The payment will hinge on “the liquidity the government has to attend to each of its obligations,” he said. “The priority will always be to attend to the essential services to citizens, such as security, health care and education.”

Puerto Rico faces $58 million of interest and principal due Aug. 1 on the Public Finance Corp. bonds, according to Moody’s Investors Service. It may miss the payment because the legislature has failed to allocate the funds, which would be the first default by the commonwealth as it moves toward restructuring $72 billion of debt.

Puerto Rico’s budget director, Luis Cruz, said in an interview published by El Vocero Monday, that the government has decided not to make the payment.

To boost liquidity, the commonwealth had been working to sell $2.9 billion of bonds backed by oil-tax revenue through its Infrastructure Financing Authority, called Prifa. Instead, officials are now looking to borrow as much as $500 million in short-term debt backed by oil taxes, Suarez said.

“The Prifa transaction will take a little bit longer and will be smaller than initially planned, in the neighborhood of $400 million to $500 million,” Suarez said.

by Ezra Fieser

Puerto Rico Lacks Cash for Aug. Bond Payment, Official Says

The Puerto Rico Debt Crisis, Explained

Puerto Rico is on its way to one of the largest debt defaults in history, right up there with Greece and Argentina. If you want to know what's happening in Puerto Rico, Anne Krueger is where you must start.

At 81, the former chief economist for the IMF has written, with two co-authors, a brief but incisive paper that has become the playbook for both the Commonwealth of Puerto Rico and its creditors. In an earlier piece in the Huffington Post, published on April 14, 2015, I cautioned that Puerto Rico's bondholders were going to have some sleepless nights.

Just 10 weeks later, the island's governor, Alejandro García Padilla, announced that the Commonwealth was unable to pay its debts, and would try to negotiate a "restructuring" with the bondholders. The Krueger report shows that their worry should not be about whether their bonds will be paid in full and on time -- her analysis shows that is simply not possible -- but rather how big are the concessions they will have to make. Equally important, she outlines the policy errors that are leading to default. Finally, she suggests a way out, using some of the pro-growth strategies of supply side economics. I will summarize the gist of her analysis.

The market has lost confidence in Puerto Rico's ability to repay debt. This kind of prophecy tends to be self-fulfilling. First lenders demand super premium interest rates, making debt service more burdensome. Default becomes more likely, and lenders shut off the spigots entirely. This loss of confidence has been driven by economic stagnation, even contraction, and persistent deficits in public finances. These deficits have been worse than investors expected: in part because public finances have been opaque, and in part because budgets were based on wildly optimistic economic assumptions.

Moreover the economic stagnation, or contraction, is not merely a result of an economic cycle but of major long term problems that make the island uncompetitive. The government of Puerto Rico has created many of these problems with its own misguided policies, but the Federal government has made a bad situation worse. "The single most telling statistic... is that only 40 percent of the population -- versus 63 percent on the U.S. mainland -- is employed or looking for work." Krueger attributes this to a Federal minimum wage which is far higher than unskilled labor earns in competing Caribbean islands, aggravated by local regulations on overtime, paid vacations, and dismissals which are more costly and onerous than on the U.S. mainland.

An overly generous welfare system undermines the incentive to take jobs at all: "One estimate shows that a household of three that is eligible for food stamps, AFDC, Medicaid, and utility subsidies could receive $1743 a month." That amount is actually higher than the median family income on the island.

Energy costs, another key economic input, are also exceedingly high, several times mainland prices. The government's electric utility, PREPA, is inefficient, overstaffed, and technologically antiquated. The Federal government's Jones Act makes things worse by requiring that all oil imports be conducted with U.S. vessels and crews. Indeed, that Act applies to all shipments to and from U.S. ports and drives transport costs generally to uncompetitive levels. Local regulation of rates and licensing for ground transportation adds to the problem.

Turning to government finances, Krueger finds that "the overall deficit is larger than recognized, its true size obscured by incomplete accounting." Public sector debt has risen every year since 2000, reaching 100 percent of GNP in 2014. One attempt after another has failed to balance the budget, which is based on extremely optimistic revenue projections (on average revenues have been only 85 percent of projected levels). Falling revenues don't drive lower spending: instead the agencies simply fail to pay their suppliers, who are required to wait longer and longer to collect.

Lax verification of payrolls aggravates the problem; and deficient accounting masks it. Consolidated reports are dense, hard to penetrate, and not timely (the most recent is for fiscal year 2013). Information on the Treasury's General Fund operations is timely but "greatly understates the true deficit and the challenge ahead." It reports on a cash basis (that is, it doesn't count purchases the government has made but not yet paid for as spending) and excludes some 150 government agencies (whose deficits it nonetheless needs to fund with cash) as well as capital expenditures, which also deplete cash balances. It's as if, in budgeting for your household, you omitted credit card purchases, expenses incurred by your children, and the cost of buying a new car.

Taking these and like items into account makes the cash situation far more problematic than is generally understood. Similar cash deficits flow from the three big state enterprises (the monopolies for electric power, water and sewers, and highways and transportation), as well as from the Employee Retirement System for government employees (which has no liquid assets at all) and the Teachers Retirement System (which will likely run out of money in a year or two). With all of this cash depletion combined, the government will need to raise nearly 5 percent of GNP to keep operating in 2016 -- a near impossibility in a zero growth economy with no access to new borrowing. Even this bleak picture can get worse if a fully blown fiscal crisis pushes the economy into a sharper retraction.

Is there a way out? The report suggests there is, but it must be both comprehensive and ambitious. The Federal Government, the bondholders, and the government of Puerto Rico must all make difficult decisions. The solution must begin with a revival of growth. The key is supply side reforms. The Commonwealth can fix local labor regulations, and eliminate obstacles to doing business. It can bring energy costs down by opening competition for electric generation to new and more efficient suppliers. The Federal Government needs to make welfare payments consistent with local market conditions, suspend the Federal minimum wage, and exempt Puerto Rico from the Jones Act.

A major fiscal adjustment is required. Revenue measures should be as growth friendly as possible, and might include VAT/Sales tax and property tax overhauls. Expense measures should include right sizing of education services (PR has more teachers per student than the wealthiest counties on the mainland), a means test for tuition at the University of PR, and elimination of Medicaid benefits in excess of Federal standards. After several years, supply side reforms ought to result in 2.5 percent growth, which will drive increased revenue collections.

But even after a major fiscal effort, and a resumption of growth, a large residual financing gap will remain. A comprehensive discussion would benefit from the orderly processes of Chapter 9 of the U.S. bankruptcy code, which Congress should extend to Puerto Rico's public enterprises. Bondholders will suffer if the Commonwealth cannot provide essential services, if there is a breakdown of order, or if the economy collapses in the wake of a crisis. They will need to relieve the island of a meaningful proportion of the interest and principal coming due in the next six or seven years. To agree to do that, they will want to be sure that the Commonwealth government is committed to politically difficult structural reforms, and that the Federal government will grant Puerto Rico the required exemptions from regulations that raise costs and stifle growth.

Supply side reforms will not be a panacea for decades of bad policy decisions, but they are an essential part of the solution.

Robert Rosenkranz                                                                          

The Puerto Rico Debt Crisis, Explained

Puerto Rico without enough cash for Aug 1 payment: Government

Puerto Rico does not have enough cash flow to meet its upcoming Public Finance Corp. payment of $169.60 million due on Aug. 1, the Governor's Chief of Staff, Victor Suarez, said Monday. (Tweet This)

Suarez added that the commonwealth's government is considering raising between $400 and $500 million through Puerto Rico's gas tax as a repayment source.

He also said the Puerto Rico Infrastructure Financing Authority (PRIFA) is abandoning its original plan of raising nearl $3 billion to refinance a $2.2 billion loan its Government Development Bank made to the Highways and Transportation Authority (HTA).

"It is not being contemplated as a $3 billion transaction, there is no market for it," said Suarez. "We are trying to achieve a smaller transaction, with reasonable terms, of some $400 to $500 million."

Read MorePuerto Rico's 'death spiral' gets a reprieve

The news came nearly two weeks after the PFC failed to transfer funds to pay the principal and interest on its bonds.

"There has to be the payment allocation by the Legislature (in the budget) and the cash flow," Suarez added. "If one of the two things is not there, we can't do (the PFC payment). Right now, both are not there."

"I think this puts other bond payments in jeopardy," John Miller, co-head of fixed income for Nuveen Assset Management, told Reuters on July 16. "All classes of bonds, as the government has said, are in greater jeopardy of non-payment in the near term."

Nevertheless, Suarez also said the Island will do everything possible to ensure the debt, which is owed by the Government Development Bank, Puerto Rico's financing arm, is paid.

Puerto Rico's ongoing debt problems have been under a microscope since Gov. Alejandro Garcia Padilla said the Island's debts were simply not payable in late June.

Correction: This story has been updated to reflect the amount due on Aug. 1 is $169.60 million.

Fred Imbert

Puerto Rico without enough cash for Aug 1 payment: Government