Puerto Rico’s governor says the commonwealth cannot pay its roughly $72 billion in debts, an admission that will probably have wide-reaching financial repercussions.
Puerto Rico’s governor, saying he needs to pull the island out of a “death spiral,” has concluded that the commonwealth cannot pay its roughly $72 billion in debts, an admission that will probably have wide-reaching financial repercussions.
Gov. Alejandro García Padilla and senior members of his staff said last week that they would probably seek significant concessions from as many as all of the island’s creditors, which could include deferring some debt payments for as long as five years or extending the timetable for repayment.
“The debt is not payable,” García Padilla said. “There is no other option. I would love to have an easier option. This is not politics, this is math.”
It is a startling admission from the governor of an island of 3.6 million people, which has piled on more municipal bond debt per capita than any American state.
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A broad restructuring by Puerto Rico sets the stage for an unprecedented test of the U.S. municipal bond market, which cities and states rely on to pay for their most basic needs, like road construction and public hospitals.
That market has been shaken by municipal bankruptcies in Detroit; Stockton, Calif.; and other cities, which undercut assumptions that local governments in the United States would always pay back their debt.
Puerto Rico’s bonds have a face value roughly eight times that of Detroit’s bonds. Its call for debt relief on such a vast scale could raise borrowing costs for other local governments as investors become more wary of lending.
Perhaps more important, much of Puerto Rico’s debt is widely held by individual investors on the U.S. mainland, in mutual funds or other investment accounts, and they may not be aware of it.
Puerto Rico, as a commonwealth, does not have the option of bankruptcy. A default on its debts would most likely leave the island, its creditors and its residents in a legal and financial limbo.
Still, García Padilla said his government could not continue to borrow money to address budget deficits while asking its residents, already struggling with high rates of poverty and crime, to shoulder most of the burden through tax increases and pension cuts.
He said creditors must now “share the sacrifices” he has imposed on the island’s residents.
“If they don’t come to the table, it will be bad for them,” said García Padilla, who plans to lay out his new strategy in a televised address to Puerto Rico residents Monday evening. “What will happen is that our economy will get into a worse situation and we’ll have less money to pay them. They will be shooting themselves in the foot.”
With some creditors, the restructuring process is under way. Late last week, Puerto Rico officials and creditors of the island’s electric-power authority were close to a deal that would avoid a default on a $416 million payment that is due Wednesday.
With other payment deadlines looming, García Padilla and his staff said they would begin looking for possible concessions on all forms of government debt.
The central government must set aside about $93 million each month to pay its general-obligation bonds — a crucial action in Puerto Rico because its constitution requires such bonds to be paid before any other expense. No American state has defaulted on general obligation debt in living memory.
The government’s Public Finance Corp., which has issued bonds to finance budget deficits in the past, owes $94 million on July 15. The Government Development Bank — the commonwealth’s fiscal agent — must repay $140 million of bond principal by Aug. 1.