Puerto Rico’s Downgrade Shows Debt Law Can’t Contain Rot

A law allowing some Puerto Rico government entities to restructure debt outside bankruptcy failed to contain a crisis as its credit rating was cut three levels, imperiling the U.S. commonwealth’s ability to finance itself.

The island’s electric authority, which could shed some of its $8.6 billion in debt by making creditors accept losses, said yesterday after the market’s close it had paid off maturing bonds in full. That was only after Moody’s Investors Service sent Puerto Rico’s rating on $14.4 billion of general-obligation debt to B2 from Ba2, and reduced sales-tax debt to speculative grade. The cuts and the restructuring measure restrict Puerto Rico’s ability to borrow, said Peter Hayes, head of municipal debt at BlackRock Inc.