Municipal bond mutual fund investors are panicking this weekend after the U.S. Commonwealth of Puerto Rico’s Legislature passed a new law allowing public agencies to default on their debt.
Although part of the United States, Puerto Rico in the 1990s made Spanish the official language and now about 86% of the island does not speak English in the home. Democrat Governor Alejandro Garcia Padilla, who has difficulty speaking English, told Bloomberg News last year that Puerto Rico had a constitutional and moral obligation to not default on the island’s $73 billion of debt. But he just passed a law giving local court proceedings the power to cancel much all of the island’s bond debt.
Wonder what sort of financial explosion this burning match will set off?