No easy way for Puerto Rico to overhaul government debt

30 Jun 2015 | Author: | No comments yet »

Focus on Puerto Rico, Washington, as island tries to avert crisis.

SAN JUAN, Puerto Rico (AP) — Puerto Rico’s governor says he will create a financial team that will meet with bondholders and seek a moratorium on debt payments.The pledge to continue paying principal and interest comes as the legislature plans to approve a $9.8 billion budget for the fiscal year starting July 1, Senate President Eduardo Bhatia and House Speaker Jaime Perello told reporters in San Juan.

WASHINGTON — Those who have been closely watching Puerto Rico’s economic decline and the reluctance for Congress or the administration to respond have been sharing an inside joke lately. “Even though there are more Puerto Ricans in the states than in Puerto Rico, some people are joking that the Cuban government has had more relations with Washington than Puerto Rico lately,” said Federico de Jesus, a political and media strategist in Washington, D.C. Puerto Rico is in the midst of what its governor, Alejandro García Padilla, pronounced to The New York Times is a “death spiral.” It faces $73 billion in debt, double digit unemployment and has been for several years watching many of its middle class leave the island for the U.S. to flee its economic woes.

Puerto Rico and its agencies have amassed more debt than all but two U.S. states as the island of 3.5 million has a history of borrowing to balance budgets. The budget will include a $300 million fund to repay Government Development Bank debt, although the bank will need additional legislative approval to access that money, Perello said. The crisis is not yet to the level of Greece, which has commanded far more attention in news headlines, but that nation has been getting assistance from the European Central Bank and other entities, unlike Puerto Rico. Items like prepared or partially prepared food, including canned foods, frozen foods, yogurts and many other food items that were not tax before will be subject to the 11.5 percent tax. In the daily briefing on Monday, White House Press Secretary Josh EarnesEarnest stopped short of saying the administration supports giving Puerto Rico the ability to file for bankruptcy, repeating that its something its asked Congress to look at.

A local news reporter in San Juan even alerted viewers that plantains, a staple in Puerto Rican cuisine, will be taxed 11.5 percent if purchased frozen. Other bonds, such as sales-tax debt, are backed by different revenue streams. “Given the complexity of the different securities and the uncertainty of the future path of economic growth, we believe the debt restructuring process is likely to be protracted and legally contentious,” Ted Hampton, a Moody’s Investors Service analyst in New York, said in an e-mail. The work done for Detroit is a template for Puerto Rico, he said, adding that what that city received from the Obama administration has been directly related to the city’s progress.

Securities maturing in July 2035 traded as low as 68.3 cents on the dollar, down from an average of 77.3 cents Friday and the weakest since they were first issued at 93 cents in March 2014, according to data compiled by Bloomberg. Although Puerto Rico’s constitution guarantees the payment of interest on general obligation bonds before anything else – firemen, police, teachers – bonds on other public entities such as its energy and water systems are not guaranteed and are under consideration for debt restructuring. Congress, has pushed a bill to allow it to use the bankruptcy provision under Chapter 9 to restructure some public utilities’ debt, the way states are allowed to do in municipalities. But the Democrat’s bill has gone nowhere amid opposition from some investors and some members of the GOP, which controls the House where the bill was introduced. In a statement, Padilla said the report, “for the first time acknowledges the true extent of the problem. “We must make difficult decisions to meet the challenges we now know are ahead and I intend to do everything in my power to lead us through this time,”Padilla said in the statement.

A full accounting shows “the central government will be starting 2016 in a deeper hole than understood, with the room for maneuver constrained by the loss of market access, dwindling cash balances and a longer queue of disgruntled suppliers,” the report states. The reports states that the steps taken by successive administrations have focused on fiscal deficits and not economic growth and were more ad hoc responses than long-term fixes. –Cut high energy costs – Puerto Rico’s utility already is in negotiations with its creditors for debt relief.

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