Puerto Rico governor calls for bankruptcy; adviser says island ‘insolvent’

30 Jun 2015 | Author: | No comments yet »

Profligate Puerto Rico on the Brink.

Puerto Rico will seek to delay payments on the island’s $72 billion debt load for “a number of years” as part of a plan to bolster the commonwealth’s finances and revive its economy, Governor Alejandro Garcia Padilla said. Officials of the U.S. territory will develop a debt-restructuring plan by Aug. 30, the governor announced in a 21-minute televised speech Monday night.

Puerto Rico, on the other hand, is for the most part left to chart its own course, and the crisis in the Caribbean is so severe because its leaders have been so much less serious. “The debt is not payable,” Alejandro García Padilla, the governor of the unincorporated American commonwealth, told the New York Times NYT -5.37 % a few days ago. “There is no other option. The island of 3.5 million people is grappling with a jobless rate double the national average and a debt load bigger than every U.S. state except California and New York.

The governor’s plan to ask bondholders to share in the island’s sacrifice came as investors are also weighing the possibility of a Greek default and exit from the euro zone. The next budget includes a $300 million fund to repay Government Development Bank debt, although the bank will need additional legislative approval to access most of that money, Perello said. Since Puerto Rico’s bonds are not subject to taxation at the state, local or federal level, portfolio managers have scooped them up to bolster returns, often without a lot of disclosure to clients regarding what, exactly, is going into their retirement accounts. 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 prospect that Puerto Rico might not repay its debts has sparked debate in Congress over a bill, H.R. 870, that would allow some of the commonwealth’s subsidiaries, like its electric and water utility companies, to file for bankruptcy.

A restructuring of the island’s securities, which are tax-exempt nationwide, would inflict pain on investors such as hedge funds and some municipal bond mutual funds. Prices on Puerto Rico’s general obligation securities maturing in July 2035 traded as low as 68.3 cents on the dollar Monday, 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. In restructuring, “the goal will be to achieve a negotiated moratorium with bondholders to postpone debt payments for a number of years, to allow that money to be invested here in Puerto Rico,” the governor said in his speech. In reality, they have raised less than $1.5 billion in new money as more Puerto Ricans move their economic activity underground, businesses cut outlays, and the exodus to the U.S. continues. In Greece, more than 150,000 government workers have been laid off amid a recession that has seen output decline by more than 25% and total employment drop by 17% since 2006.

In Puerto Rico, the decline in the real economy has been less than 8% over the past decade, and while total employment has declined 16%, the population has declined more than 10%, leaving the unemployment rate only slightly higher than it was in 2006. Yet the commonwealth continues to spend more on growth-inhibiting programs—regulations, fees and taxes—rather than on pro-growth stimulus initiatives like agency mergers, investment in business infrastructure and public-private partnerships.

The continued inability to tame spending highlights Puerto Rico’s deficit of governance that has prolonged its recession and driven its debt to crisis levels.

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