October 06, 2017

If I were Puerto Rican I would be on my knees thanking President Trump. I wish he did the same for Venezuela.

Sir, with respect to President Trump informing the markets they should wave “goodbye” to Puerto Rico’s outstanding $74bn bonds, Gillian Tett writes: “it is hard to argue that the foreign investors deserve much sympathy: they bought Puerto Rico debt precisely because this offered sky-high yields to compensate for equally high risks.” "Puerto Rico’s recovery depends on debt forgiveness” October 6.

Precisely, the creditors should not be able to eat the cake and have it too.

I have often argued that in any restructuring process one would not want lenders who lent to the sovereign at low rates, or acquired sovereign debt when no repayment problems were envisaged, bona fide lenders, to receive the same treatment as those lenders who lending at high speculative rates, perhaps even helped to create the crisis that demands a debt resolution.

And, nothing discloses the frontiers between bona fide and speculative debts better than the expected risk premiums when debts are negotiated. Perhaps any sovereign debt that reflects a risk premium that exceeds for instance by 4 percent the lowest interest rate paid for similar debt to other sovereigns, the speculative threshold rate, STR, should be classified as speculative sovereign debt, SSD.

And in the case of a restructuring of a sovereign debt, any creditor who entered in possession of his credit in conditions that would deem it to be a SSD, should have all interest received in excess of the allowed STR, automatically deducted from the principal.”

Would that work? I have no idea but at least it could help restrain creditors from financing sovereigns that have not earned the right to be financed.

PS. I wish President Trump would send a similar “goodbye” message to Goldman Sachs for financing the Venezuelan regime.