Trump's First Move on Puerto Rico Debt Is a Classic Emerging Markets Play

El-Erian Sees Future Puerto Rican Debt Reduction

President Donald Trump’s starting point for repaying Puerto Rico’s $74 billion in debt -- zero -- isn’t just hallmark behavior from the man who wrote “The Art of the Deal.” It recalls some classic emerging-market sovereign debt restructurings of recent years.

Think Argentina, which long argued that its ability to repay $100 billion in debt was next to nothing. Every time the populist president spoke about the country’s liabilities, creditors were cast as “vultures” and the other main party trying to bring Argentina in line was dubbed “The International Misery Fund.” And there’s Ecuador, where populist President Rafael Correa rose to power in 2007 on an anti-investor platform and declared the national debt illegitimate.

True, Puerto Rico is a commonwealth and the liabilities are municipal bonds, not U.S. sovereign debt, but Trump’s suggestion that “you can say goodbye to that” debt bears the hallmarks of a populist leader facing tumult in the streets.

It doesn’t necessarily mean that’s the final offer, though. Those worried that the president will actually “wipe out” the debt can take some comfort from the eventual deals. Correa’s government wound up paying 35 cents on those “illegitimate” bonds. In Buenos Aires, even though it took more than a decade to work out, Argentina regained access to international capital markets by paying back about 25 cents on the dollar.

That’s a lot more than zero, though maybe much less than what Argentina could have paid. And that’s the art of the deal.

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