Puerto Rican debt: politicians looked for ways around the law – Financial Times (Aug. 6, 2015)

With reference to “Puerto Rico on the brink of debt default” (Aug. 3, 2015), it cannot be overemphasized that the bonds of the Public Finance Corporation on which default is set to occur are “appropriation bonds”. As such, they are not legally binding obligations of the government of Puerto Rico.  On the first page in bold, the PFC bond contract said this to investors who nevertheless decided to speculate in these securities.

However, what is missing from your report and almost all mainstream media thus far is the backstory of this puzzling type of debt instrument.   Puerto Rico, like many other U.S. states and municipalities, has a legal debt limit and balanced budget requirement.  The fundamental purpose of these legal constraints is to protect taxpayers from excessive debt.   Yet, as it is politically easier to borrow than to tax, politicians looked for ways around the law.  Enter appropriation bonds.

But the Puerto Rico government did not stop there.  The result is the bewildering multi-headed hydra of government-affiliated debt depicted in your report a few months ago (“Puerto Rico debt calculus grows more complex” – by Robin Wigglesworth, May 29).

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