Is Puerto Rico following Argentina’s path?

December 27, 2013

The mysterious borrowing undertaken by the Puerto Rico Government Development Bank in the middle of December has been explained. The GDB issued a press release that said that it had “borrowed” $110 million from the state workers insurance fund:

Government Development Bank for Puerto Rico (GDB) Interim President José Pagán Beauchamp today confirmed the GDB’s placement of $110 million in Senior Guaranteed Notes with the Puerto Rico State Insurance Fund Corporation. The bonds have a coupon of 8 percent per annum and have maturities of $40 million, $30 million and $40 million on December 1, 2017, December 1, 2018 and December 1, 2019, respectively.

It looks like a desperate grasp for liquidity. The GDB, however, calls it a plus for the state workers insurance fund that it “borrowed” assets and improved its cash flow.

‘This transaction is a part of our previously announced strategy to bring Commonwealth deposits to the GDB,’ said Pagan. ‘It achieves two objectives simultaneously – increasing GDB’s liquidity and improving the cash flow of the State Insurance Fund. Combined with fiscal reforms recently signed into law that will strengthen the teachers’ pension system, today’s announcement reflects another step in improving the Commonwealth’s near-term economic situation and long-term economic outlook.’

The interest rate on this intergovernmental borrowing for 4, 5, and 6 year loans is 8 percent – extremely high. Here is how Puerto Rico said it would address its cash needs last October when it said it had sufficient liquidity through fiscal year 2014 (June 30):

This is not the first time a sovereign has borrowed or taken assets that were set aside for pensions or workers’ compensation funds. In 2008, Ambrose Evans Pierce of The Telegraph wrote about Argentina:

Here is a warning to us all. The Argentine state is taking control of the country’s privately-managed pension funds in a drastic move to raise cash.

It is a foretaste of what may happen across the world as governments discover that tax revenue [falls short], and discover that the bond markets are unwilling to plug the gap. The G7 states are already acquiring an unhealthy taste for the arbitrary seizure of private property…

…Argentine sovereign debt was trading at 29 cents on the dollar today, pushing the yield to 25 percent. Tempted?

Intergovernmental borrowing also happens. In 2011, the Tax Foundation wrote about U.S. states borrowing from the federal government to fund extended unemployment benefits:

High rates of unemployment and benefits lasting up to 99 weeks have led 34 states to borrow over $37 billion from the federal government to pay benefits. States are not expected to repay these amounts for some time and must begin paying interest on their balances in 2011.

One could view the move by the GDB as desperate, but the GDB could also be viewed just like U.S. states that borrow from the federal government to tide themselves over in a period of tough economic conditions. The primary problem is that the GDB has not released any financials since it published them for 2012. The market has to rely on information that is almost 18 months old. Is this $110 million borrowing from the state insurance fund good cash management or a desperate move to get liquidity? Stay tuned.


We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see


Argentina is for economists with a sense of humor. It’s for anyone who likes a good drink and a good laugh. And for anyone who wants a peek at P.R.?

The Argentines pulled off the biggest default on sovereign debt in history. In 2001, they defaulted on $132 billion in loans. Later, they negotiated a settlement that left lenders with their worst haircut ever.

But at least the lenders must have had fun. They came down to Buenos Aires on rich expense accounts. They stayed at the Four Seasons. They ate steaks that were thicker than glaciers…and washed them down with a whole rio of malbec. They probably went to a few tango shows too. The visit may have cost them billions…but heck…

…it wasn’t their money.

So what kind of crisis will P.R. have? No one knows.

Posted by BBrite | Report as abusive

Last time I checked, the U.S. gov’t borrowed over $4T from the SoSec fund, on top of $12.8T it borrowed externally, and counting. So, how is this PR borrowing different? Answer: relative scale — $110M over $70B is negligible. PR said it would return to the bond markets in early 2014 (see

Posted by CraigL | Report as abusive

Argentina is a convenient example for your agenda. Did you consider Ireland or Portugal as other examples (Irish pension fund to be tapped for €12.5bn, fb3e-11df-b576-00144feab49a.html#axzz2oy BmS57J) or does the recovery / turnaround there not fit with your pre-determined conclusion of default?

Posted by bdbd10 | Report as abusive