President Donald Trump’s budget chief said not to take literally the president’s suggestion that Puerto Rico’s debt would be “wiped out,” even as the territory’s bonds plunged to a record low on Wednesday: 32 cents on the dollar.

"I think what you heard the president say is that Puerto Rico is going to have to figure out a way to solve its debt problem,” Mick Mulvaney, director of the White House budget office, said in an interview Wednesday.

Puerto Rico, ravaged by Hurricane Maria on Sept. 20, is dealing with a disaster worsened by the long-term debt crisis that led it to declare a form of bankruptcy this year.

The commonwealth’s government for decades has been plagued by budget deficits and borrowed $74 billion in a spree enabled by a yield-hungry Wall Street.
 
After the president suggested that the debt must be erased, a benchmark general-obligation bond due in 2035 plunged 12 cents on the dollar Wednesday morning. The price later rebounded.

On Wednesday morning, Mulvaney tempered Trump’s comments in a Fox News interview after the president surveyed damage on the island.

“We are going to work something out” on Puerto Rico’s debt, Trump said.

“We have to look at their whole debt structure,” Trump said. “They owe a lot of money to your friends on Wall Street. We’re going to have to wipe that out. That’s going to have to be -- you know, you can say goodbye to that. I don’t know if it’s Goldman Sachs but whoever it is, you can wave goodbye to that.”

Mulvaney said Wednesday that the administration is devising an aid package to send to Congress that will deal with rebuilding and repair.

“We are not going to bail them out,” he said. “We are not going to pay off those debts. We are not going to bail out those bond holders.”

Mulvaney didn’t directly address the president’s suggestion that the debt simply wouldn’t be paid.

Trump’s ‘Opinion’

Puerto Rico began defaulting on its debts two years ago, seeking to avoid Draconian budget cuts officials said would deal another blow to an already shrinking economy. With nearly half of its 3.4 million residents living in poverty, the government sought protection from creditors in May.

At a press conference in San Juan on Wednesday, Governor Ricardo Rossello dismissed Trump’s remarks and said Puerto Rico will resolve its debt through the bankruptcy process.

“As far as the comments made about wiping the debt clean, that is the opinion of the president. Puerto Rico is already involved on a judicial front,” he said.

Trump visited the island Tuesday, where he met local officials and offered consolation to residents who’ve been without power and short of drinking water since the storm struck. At least 34 people were killed by the hurricane and about 93 percent of homes there still lacked electricity Tuesday.

Moody’s Analytics estimated that the island suffered $95 billion in hurricane-related damage. With little financial ability to recover from the storm on its own, the island’s government will rely heavily on aid from Washington to get back on its feet.

Disaster Aid

The White House is crafting a $29 billion disaster-aid package it intends to send to Congress that would include $16 billion to shore up the federal flood insurance program and $13 billion in additional relief covering the entire hurricane and wildfire season, including major storms that hit Texas, Louisiana and Florida as well as Puerto Rico, according to a Republican lawmaker.

At a briefing with local officials in an airport hangar, Trump complained -- perhaps as a joke -- about the expense of the federal storm response. “I hate to tell you, Puerto Rico, but you’ve thrown our budget a little out of whack -- because we’ve spent a lot of money on Puerto Rico and that’s fine, we’ve saved a lot of lives,” Trump said.

With a population the size of Connecticut’s and an economy smaller than Nebraska’s, Puerto Rico has more debt than any U.S. state government except California, New York and Massachusetts. The debt, a result of generations of mismanagement, was enabled by Wall Street, which was enticed by the fact it was tax-free everywhere in the U.S. and risky enough to provide rich yields.

It isn’t clear how Puerto Rico’s debt could just be made to disappear outside bankruptcy court. Still, to “wipe out” $74 billion in municipal debt, billions of which are guaranteed by the island’s constitution, would shake investor faith in a market long considered one of the safest of havens. Lower-rated municipal borrowers would almost certainly see their borrowing costs rise to account for the added risk.

The debt is widely held, by hedge funds, pensions and residents of the territory.

BlackRock Inc., Franklin Templeton Investments, Goldman Sachs Group Inc.’s asset-management unit and Loomis, Sayles & Co. are the biggest holders, according to company filings between June and August compiled by Bloomberg. A spokesman for Goldman Sachs declined to comment on their holdings and plans, while officials for BlackRock, Franklin Templeton and Loomis, Sayles were not immediately available for comment.

Spokesmen representing a group of general obligation bondholders and a group of some sales tax bondholders declined to comment. Other representatives of the island’s creditors didn’t immediately respond to requests for comment.

Immediate Steps

The commonwealth’s budget is under the control of a federally appointed oversight board mandated as part of the bankruptcy legislation. Created by Congress to wield broad sway over the territory’s finances, the panel approves the island’s budget and is meant to help make unpalatable decisions such as closing schools and cracking down on tax evasion. Puerto Rico’s Fiscal Oversight Board wrote to lawmakers Tuesday asking for immediate help with recovery costs.

Jerome Garffer, a former board member of the insolvent Puerto Rico Electric Power Authority, said bondholders are "going to have to wait a while" as the territory recovers.

"If pre-Maria there were hardships, then post-Maria I think the paradigm has totally changed," Garffer said late Tuesday night in San Juan. "Even though I am a finance guy, there are just other priorities that are more important right now then just paying the bondholders." 

"At a time like this, there’s just absolutely no way."