What Went Wrong?: The Puerto Rican Debt Crisis and the ‘Treasury Put’
Abstract:
What went wrong? Why did seemingly rational bond investors continue to purchase Puerto Rican de bt with only a modest risk premium, even though macroeconomic fundamentals were dismal? Investors were either stunningly myopic or Puerto Rican debt w as implicitly insured by the U.S. Treasury. The rational investor model rul es out the former. This project examines the latter hypothesis, labeled the “Treasury Put.” The expectation of a federal bailout was perfectly reasona ble given past behavior by the Federal Government, especially the prior bai lout of the city of New York. Evaluating the “Treasury Put” hypothesis with a minimal set of assumptions is possible given two fortuitous features – a unique characteristic of Puerto Rican bonds and a “seismic shock.” Puerto Rico issued both uninsured and insured general obligation bonds. These bond s were issued on the same day and, in many cases, with the exact same matur ity. These features allow us to compute accurately the risk premia. The sec ond feature was the non-bailout of Detroit in 2013 that effectively extingu ished the Treasury Put. Preliminary calculations indicate that Puerto Rican risk premia were stable before the Detroit bankruptcy and bracketed by the risk premia on Corporate Aaa and Baa bonds, but widened dramatically there after, thus supporting the existence of a “Treasury Put” and a misallocatio n of capital to Puerto Rico.
DTSTAMP:20260406T174457Z DTSTART:20180508T130000Z DTEND:20180508T140000Z SEQUENCE:0 TRANSP:OPAQUE END:VEVENT END:VCALENDAR