Thursday, September 12, 2013

The Difference Between Detroit and Puerto Rico

It seems muniland has gone on a Puerto Rico default watch recently, as it searches the next domino to fall after Detroit.  This is misguided.  Dominoes is a particularly inapt analogy to use in analyzing risk in muniland (as Meredith Whitney might have learned), and this Puerto Rico default watch too shall soon pass.

The principal difference between Detroit and Puerto Rico is that Detroit wanted to default and Puerto Rico doesn't want to default.  Detroit carefully planned out its default, getting special state legislation passed to enable it to become a chapter 9 debtor, and Detroit's game plan is to impose significant haircuts on bond and pension creditors, since Detroit knows it won't be able to access public muniland markets after its chapter 9 filing until well after the cows come home.

Puerto Rico cannot avail itself of chapter 9, and the last thing it wants is to commence a massive creditor restructuring outside of a court-supervised process.  This is not to say that Puerto Rico doesn't face significant economic development issues going forward, but muniland should regard Puerto Rico's successful pension reform that it concluded earlier this year as the best evidence that Puerto Rico not only needs public finance markets but that, unlike Detroit, Puerto Rico places great importance on having continued access to them.

Disclosure:  No holdings of Detroit or Puerto Rico debt.
NB:  this blog is not intended to be investment advice, and should not be relied upon by anyone to constitute investment advice.  Investing is a tough game, and everyone must do and "own" their own work, because you will certainly own your investments.

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