I do not understand a moral obligation bond

Hi I would like to borrow some money from you and my contract says I do not have to repay you if it turns out that I can but do not want to.  Of course there is nuance, but the reporter should have covered that.

While Puerto Rico made some other bond payments that were due on Monday, attention in the financial markets was focused on the decision to skip the $58 million in payments due on about 20 so-called moral obligation bonds. Those bonds were issued by a subsidiary of the Government Development Bank for a variety of projects — including school construction and the creation of landfills.

The government bank initially financed the projects, then refinanced them through its subsidiary, the Public Finance Corporation. By tapping the municipal bond market in that way, the bank removed the liabilities from its own balance sheet.

Even though this particular type of bond does not carry with it a legal requirement for repayment, market experts said Puerto Rico’s decision not to pay amounted to a default and left them perplexed about the strategy of paying some bonds while letting others lapse.

via Puerto Rico Defaults on Bond Payment – The New York Times.

About mkevane

Economist at Santa Clara University and Director of Friends of African Village Libraries.
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