The Contrarian

“In the investment markets, what everyone knows is usually not worth knowing.”

Puerto Rico: A Slow Motion Default

The Puerto Rico Government Development Bank (GDB) made a $355 million Dec. 1 debt service payment from money that it did not have on its balance sheet.

Here is what David Kotok’s Cumberland Advisors wrote in an interesting article:

Island officials have stated that the Commonwealth has begun clawing back money from highways, the convention center, the IFA, and the metro. In doing so, they have, in the words of the governor, “begun to default on our debt.” His written testimony to the US Senate Judiciary Committee contained the following:

I ordered the ‘clawback’ of revenues assigned to certain instrumentalities of the Commonwealth for the repayment of their debt. Together these instrumentalities have approximately seven billion in bonds outstanding. In simple terms, we have begun to default on our debt in an effort to attempt to repay bonds issued with the full faith and credit of the Commonwealth and secure sufficient resources to protect the life, health, safety, and welfare of the people of Puerto Rico.

You see, it’s a matter of robbing Peter to pay Paul. What can possibly go wrong!