Puerto Rico: Too late for alarm

By:
Published on:

Puerto Rico should have seen the warning signs three years ago, when the long-term investors moved out and the hedge funds moved in.

abandoned_hotel_puerto_rico

A caretaker looks out from a window of the luxury Normandie Hotel closed since 2008, in San Juan, Puerto Rico, as a result of the troubled economy

The involvement of hedge funds in advising Puerto Rico how to pay back its debt is ringing alarm bells far too late for the Puerto Rican people. 

The US territory has been in financial difficulty for several years but in August failed to repay a $58 million bond. Hedge funds who bought bonds at distressed prices are now pushing for austerity measures such as cuts in education to get their money back and they want those actions made now.

Their suggestions are not unreasonable, or even outrageous, given Puerto Rico is $73 billion in debt in total and given they did invest. Although investments come with risk, which hedge funds know very well and that risk allowed them to get discounted prices. Aggressively seeking positive returns by pressuring Puerto Rico to take measures that could slow an economic recovery further is not in the best interests of the country. 

But what to do? Traditional municipal investors, which are longer-term in their nature and therefore more aligned with municipalities’ needs, got out of Puerto Rico’s debt long ago when the writing was on the wall. Short-term hedge fund investors stepped in. That should have been when the alarm went off. Not now, three years later. 

Aggressive nature

Financial institutions are not expected to be moral. Maybe at one time they were, but the world has since shown that governments are too soft to punish those that play a hand in ruining economies. Short-term investors are also aggressive by their very nature – so when hedge funds start buying your country’s debt, you know that you are heading for a fall and there will be a lot of pain. Detroit, Argentina, Greece – these are all former examples of when hedge funds became involved. 

But it is not that their involvement means a country will suffer. Rather their involvement is a sign that unless changes are made imminently, then the story will play out with financial institutions dictating to governments. They saw the opportunity – and that should be the warning sign. For people to complain now is understandable, but Puerto Rico should serve as another example that when short-term investors start moving in, that is when governments need to be pressured to shape up and make cuts. Lest they do so down the line at the behest of someone far less qualified.