Puerto Rico and its creditors finally caught a break, at least for one day.
Bonds of the bankrupt U.S. territory soared more than 20 percent Monday after the government surprised investors by projecting that a flood of disaster-relief funds will do what officials for years couldn’t. And that’s revive the moribund economy enough to replace chronic deficits with increasing surpluses, before any debt payments are made.
There’s still a big question mark over whether Puerto Rico actually can deliver, given its history of fiscal folly and an exodus of residents.
But the bond rally signals optimism that investors may not lose quite as much as initially feared from what has been the largest municipal bankruptcy in U.S. history, even as residents brace for a new era of fiscal austerity.
The government’s latest financial turnaround plan marks the second time in as many months that it’s offered a more sanguine outlook for its recovery.
It projects that Puerto Rico will have a surplus, excluding bond payments, of $6 billion over the next six years after implementing plans to steady its finances. That’s up from $3.4 billion projected last month.
In January, while still gauging the toll of the storm, it estimated that it would have essentially no money for debts because of the devastation.
“The move is bigger than expected, but it is in reaction to the fiscal plan which has come out more positively than previous ones,” said Daniel Solender, head of municipal investments at Lord Abbett and Co., which holds Puerto Rico securities among its $20 billion of state and local debt.
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“There still is a long way to go, but there is growing optimism that things have moved better than worst-case scenarios.”