Last week, the GDB sent a letter to Puerto Rican lawmakers explaining that the Government would run out of liquidity in 3 months and that this would result in a Government shutdown. 

The letter has resulted in all sorts of political responses and posturing but the truth is that lenders will not lend Puerto Rico significant amounts of money unless a credible and balanced budget is passed. This new budget will need to include a new tax regime which significantly reduces tax evasion and results in sustainable and predictable revenues. Along with predictable and sustainable revenues, cuts also need to be made to Government expenses. 

Once congress passes a credible budget, PRIFA can come to market and lenders will likely lend the 2.9 billion needed to pay down GDB loans to PRHTA. This will give the GDB the liquidity needed to help Puerto Rico operate.  Sometimes the truth hurts, but often a little hurt is needed to get legislators to move forward. 

SP downgraded PR GOs to CCC+ citing the risk that legislators may not agree on tax reform and a balanced budget which would prevent the PRIFA deal from getting done. Market prices have not weakened on this news and are holding steady indicating that this risk may be priced into the market.