Government Bond Defaults Begin

Puerto Rico Says It Will Default on Some Bonds

Puerto Rico will default on nearly $174 million in principal and interest payments on bonds on Friday, the first day of 2016, the governor said on Wednesday, increasing the likelihood that the island will face lawsuits from an array of creditors.

In a briefing for journalists, Gov. Alejandro García Padilla said only some of the payments would be halted immediately. They include $35.9 million due to holders of bonds issued by its Infrastructure Financing Authority, and $1.4 million due to holders of its Public Finance Corporation’s bonds.

In a stark example of the financial version of musical chairs that has been playing out on the island in recent months, the government will divert a total of $174 million from lower-grade bonds to pay holders of the legally protected general obligation bonds. That diversion, known as a “clawback,” technically amounts to a default even though some of those creditors will not see a difference in their payments on Jan. 1.

 My view:

Puerto Rico is only the tip of the iceberg.  Expect municipal and state defaults over the next couple of years to appear on the radar.  Bonds may be riskier than we think.