Puerto Rico Governor Calls for Delay in Debt Payments for ‘Number of Years’

30 Jun 2015 | Author: | No comments yet »

Puerto Rico Debt Crisis Splits Congress on Party Lines and Draws Muted Response From White House.

Puerto Rico’s bonds plummeted on Monday after the commonwealth’s governor said that its $72 billion in debts were “not payable” — bringing to light the few options that investors have to collect on the money they lent to the US territory. Alejandro Garcia Padilla said the U.S. commonwealth can’t pay its debts and called for a negotiated agreement with bondholders to delay payment for “a number of years” to help restore the island to prosperity.

During the last eight years, Puerto Rico has binged on debt in order to pay for infrastructure projects — everything from the expansion of commuter trains to convention centers — that ran over-budget and were under-attended and poorly managed, said Robert Donahue, a managing director at Municipal Market Analytics, which does research on public debt. It was also aimed at leaders in Washington, who perhaps more than anyone could determine whether Puerto Rico’s finances can be stabilized or will slide into chaos.

The territory’s $3.5 billion bond offering last year, which dropped 11.4 percent on Monday, to 68.75 cents on the dollar, was used to pay off money it owed to its government development bank, bond data show. Without such a plan, “the option is unplanned and unilateral default of our obligations, with all the negative consequences that this implies for each and every one of us,” he said. The White House made it clear that Puerto Rico would not receive a “federal bailout” but expressed some support for an effort to allow the island’s public corporations to use federal bankruptcy protections. A key point in the proposal is to get permission for Puerto Rico to go through bankruptcy as Detroit did in 2013, something that current law prohibits. “It is time for us to ask for concerted actions from Washington, in one voice, now.

As a United States commonwealth, Puerto Rico is not allowed to authorize bankruptcy, which means that impairing its debts could prove practically impossible. Padilla said. “We cannot allow the situation to force us to choose between paying our creditors and paying our policemen, teachers and nurses.” He also called for lawmakers in Washington to allow Puerto Rico’s municipal entities access to the protections afforded under chapter 9 of the bankruptcy code. Puerto Rico, like U.S. states, can’t file for chapter 9 bankruptcy protection, which is an option for cities and towns and any subdivision, agency or “instrumentality” of a state.

The debate could have significant ramifications for the 2016 presidential elections, particularly in the critical battleground state of Florida, which has a growing population of people who have left Puerto Rico. García Padilla also cited the report, which was commissioned by the Puerto Rican government, in arguing against austerity as the key to solving the territory’s problems. “As the report states, even if we increased taxes and cut back spending, the magnitude of the problem is such because of the weight of the debt we carry, that it would solve nothing,” he said. Padilla said. “All the measures we have taken in the last two years reflect our willingness to pay and, had we not taken them, we would not be in a position today to request restructuring.

We have done all that was within our power, but, as the report makes clear, the next step must be to ensure more favorable terms for the repayment of our debt.” In a related development, Fitch Ratings cut Puerto Rico’s general-obligation debt rating further into speculative or “junk” territory earlier Monday, to CC from B, warning of possible future downgrades. While investors have been expecting some kind of restructuring of Puerto Rico’s debt in the coming months, the governor’s statement indicated that even general obligation bonds, whose repayment is guaranteed by the island’s constitution, could be altered. Investors said the broad gains in the municipal bond market showed that Puerto Rico’s problems, while dire, would not lead to more systemic disruptions in the $3.7 trillion market that lends money to cities and states. “It is an overwhelmingly high-quality market,” said Hugh McGuirk, a vice president and portfolio manager at T. Puerto Rico officials and their lawyers proposed that the Treasury guarantee some of the island’s bonds to lower its borrowing costs, people briefed on the matter said.

Puerto Rico’s nonvoting member of the House of Representatives, Pedro Pierluisi, has sponsored a bill, the Puerto Rico Chapter 9 Uniformity Act of 2015, which would allow certain parts of the Puerto Rico government to seek bankruptcy protection. One major public corporation on the island is Puerto Rico’s electric power authority, which has about $9 billion of bonds and owes a cash payment of $416 million to its bondholders on Wednesday. Puerto Rico’s financial problems may be confined to the island, but they are resonating with the roughly five million people of Puerto Rican descent living on the United States mainland.

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