Markets

Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

What do you do if you have $70 billion in debt you can't pay back?

Well, if you're Puerto Rico, you improbably think about possibly selling even more bonds.

In a move that could only be described charitably as counterintuitive, the island’s Government Development Bank may issue taxable bonds in the near future, according regulatory filings reported by Bloomberg’s Michelle Kaske in an article on Wednesday.

At first glance, the action raises the question of why anyone would lend to Puerto Rico right now. The commonwealth is facing an escalating financial crisis that has no easy solution. It lacks a way to file for bankruptcy protection. It faces many sophisticated creditors armed with teams of lawyers. And it’s quickly running out of cash. Its residents are suffering under extreme austerity.

Long Decline
Puerto Rico's economy has been shrinking over the past decade
Source: World Bank Group
Note: Puerto Rico has not filed audited financial statements for 2014

The most plausible explanation is that existing Puerto Rico bondholders may want to prolong this mess from exploding for as long as possible. This new issuance will probably be just a drop in the bucket compared with the mountain of existing debt, but it could help refinance a small pool of obligations for another year, helping Puerto Rico avoid default on a $422 million bond payment due at the beginning of May.

Bond Bust
Puerto Rico's bonds have steadily lost value in recent years
Source: MSRB, Bloomberg

In other words, Puerto Rico is spending time and money dodging default for one more month. This shows just how badly the commonwealth wants to buy itself more time to either receive congressionally approved tools to restructure its debt, win a favorable Supreme Court ruling on its own attempt to adopt a bankruptcy law or come to some agreement with creditors.

And perhaps some bond investors enjoy kicking the can down the road again. After all, a big default would set off a flurry of lawsuits and an escalation of the internecine debt-holder skirmishes over how to restructure Puerto Rico's obligations.

But Puerto Rico doesn't seem to be close to finding a solution through investor diplomacy, Congress or the Supreme Court. House leaders concede there is little chance of passing a bill before a debt payment comes due on May 1. The earliest the court will rule is this summer.

Meanwhile, bond investors are arguing over everything from the congressional legislation to an appropriate counterproposal to Puerto Rico's planned reorganization.

There are fractures within Puerto Rico as well. The commonwealth's House of Representatives late Monday passed a measure that would exclude Puerto Rico's $13 billion of general obligation bonds from a new debt-moratorium law. Governor Alejandro Garcia Padilla says he'll veto it. 

Even if Puerto Rico kicks the May 1 can down the road, it has an even bigger $2 billion debt payment due in July that it'll have to finance.

It's hard to see how prolonging a significant default is going to help the island. There's no neat solution. Some of its obligations will have to be written down. But spending more time and money on pushing out a fraction of its maturing debt seems unhelpful unless all parties are truly ready to make some hard concessions. And that seems so far away.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lisa Abramowicz in New York at labramowicz@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net