Puerto Rico: The Largest Local Government Bankruptcy in History

Puerto Rico: The Largest Local Government Bankruptcy in History

Puerto Rico’s finances have been in a downward spiral for years now. It defaulted on a bond payment back in 2015, after racking up more than $70 billion in public debt. That led President Obama to introduce a package of austerity measures called the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA).

The PROMESA bill slashed public spending and raised taxes in an effort to get the island’s fiscal situation under control. In many ways, the crisis has played out in a similar way to the Greek sovereign debt crisis - complete with widespread civil unrest.

And ultimately, the PROMESA’s strict cuts failed to solve the problem. Last Wednesday, the island was placed under the protection of a court-supervised debt restructuring process. It will be the largest local government bankruptcy in U.S. history.

The news flattened out the monthly performance of the municipal bond market. The Vanguard Tax-Exempt Bond ETF (NYSE: VTBF) had made some gains earlier in the month, but the implications of Puerto Rico’s massive bankruptcy have erased any positive momentum in the fund.

Next week, the bankruptcy proceedings will start - and we’ll see whether this crisis has a long-term effect on the U.S. muni bond market.