Puerto Rico staggers under $72 billion in debt, could throw investors into tailspin

29 Jun 2015 | Author: | No comments yet »

Millions of American Retirees at Risk if Puerto Rico Defaults on Debts.

As the world watches with anticipation whether Greece will reach a deal with its creditors, another government may be heading down the fraught path towards debt negotiations. “The debt is not payable.WASHINGTON (AP) — The White House threw cold water Monday on the notion of bailing out Puerto Rico from its financial crisis, instead urging Congress to consider changing the law so the island can declare bankruptcy.The municipal bond market is anxiously waiting to hear how Puerto Rico’s Governor Alejandro Garcia Padilla plans to pay back billions of dollars in public debt.

On the heels of a dismal economic report, Puerto Rico’s governor has warned that the commonwealth can’t pay its $72 billion public debt, delivering a serious blow to Puerto Rico’s recession-addled economy. But White House spokesman Josh Earnest said the federal government would provide financial expertise and access to existing resources — but not a bailout. “There’s no one in the administration or in D.C. that’s contemplating a federal bailout of Puerto Rico,” Earnest said. “But we do remain committed to working with Puerto Rico and their leaders as they address the serious challenges.” Earnest said the Treasury Department is working with Puerto Rican officials to offer advice, and that an interagency task force would help the island identify federal programs and funds it might be able to tap into. ET on Monday he will address the commonwealth’s 3.6 million citizens Between June 30th and July 3rd, Puerto Rico has to make close to $2 billion dollars in payments on its debt. But making those payments will leave the region essentially broke and unable to cover day-to-day expenses or make future debt payments as early as mid-July.

This is math.” (RELATED: Congress Could Make US Retirees Shoulder Puerto Rico’s Debt) The Times called Puerto Rico’s scenario an ‘unprecedented test’ for the U.S. bond market, the same one states and cities use for infrastructure and development projects. Consequently, a failure to find consensus with creditors could begin a long and laborious, and heretofore unknown, process to solve the island’s financial woes. Puerto Rico’s bonds had been popular with US mutual funds because they were tax free, but the island’s debt was gobbled up by hedge funds, which were attracted by falling credit ratings. “The markets are clear that Puerto Rico is heading to a direction of a restructuring or default,” said Jose Villamil, a former UN consultant, adding that a voluntary restructuring by bondholders might be the best option, AP reported. “The last four administrations have kicked the can down the road,” said Villamil. “At this point, there is no more can to kick.

The island’s troubles are a direct result of its shrinking economy, which took a major hit when corporate tax breaks expired in 2006, leading to the departure of pharmaceutical companies and other manufacturers, according to The Wall Street Journal. As the declining economy cut into tax receipts, the government made up for the shortfall with increased borrowing, taking advantage of a federal law exempting Puerto Rican bonds from federal, state, or local taxation.

Bonds have traditionally been considered one of the safest bets an investor could make, but the belief in municipal bonds began to falter in recent years after cities such as Detroit and Vallejo, California filed for bankruptcy. It’s going to hurt, but there’s no way out.” These strict measures may include calls for budget cuts of $674 million and setting aside $1.5 billion to pay off debts.

The budget needs to be approved by the island’s government on Tuesday. “I think it’s irresponsible,” said Republican Jenniffer Gonzalez. “He met privately with the New York Times last week, but he hasn’t met with the leaders of this island.” Gonzalez added that Puerto Rico’s constitution mentions the debt has to be paid before any other financial obligations can be met. If not, we will be in a death spiral.” In April 2014, Puerto Rico contemplated more than a hundred different proposals intended to jumpstart its sagging economy, including legalizing prostitution and marijuana use.

Nearly 370 different ideas to dig the government out of $70-billion debt were submitted, and lawmakers picked out 156 of them for further consideration. Among the methods tried were raising taxes, cutting government employment, and reducing pensions, but these moves have failed to spark economic growth. Rosenblum says, “it doesn’t matter what kind of fund it is you could have Puerto Rico exposure.” In some cases that debt may be uninsured leaving the muni bond funds and their investors on the hook as Puerto Rico forces a restructuring. In addition to pursuing “a voluntary exchange of old bonds for new ones with later or lower debt services,” the report also calls for government-wide spending cuts, tax increases, and reforms designed to make the Puerto Rican economy more competitive. As the island’s credit rating dropped, many hedge funds began buying Puerto Rican debt at high interest rates in an effort to prolong loan payments and drive down the borrowing costs constraining Puerto Rico’s struggling economy.

The government could save about $900 million by 2020, for instance, by reducing university subsidies and cutting the number of teachers to better reflect the 40 percent decline in students over the last decade. At the same time, the report recommends “the introduction of a sales tax proposed by the current administration could yield $1 billion a year from 2016,” and suggests increasing property taxes by about $100 million per year, noting that the tax is currently assessed based on property values from 1954. Puerto Rico now has more debt per capita than any state in the country, and the resulting economic hardships have led to a mass exodus from the island to the mainland.

Now the government’s Public Finance Corporation, which has previously issued bonds to finance budget deficits, owes a $94 million payment on July 15, and the Government Development Bank, the commonwealth’s fiscal agent, is obliged to pay $140 million of bond principal by August 1. Garcia Padilla indicated that creditors will have to “share the sacrifices” imposed on Puerto Rico’s citizenry, saying, “If they don’t come to the table, it will be bad for them.” “What will happen is that our economy will get into a worse situation and we’ll have less money to pay them,” he explained. “They will be shooting themselves in the foot.” Content created by The Daily Caller News Foundation is available without charge to any eligible news publisher that can provide a large audience.

On Tuesday the governor will deliver a speech following the release of a report by former International Monetary Fund and World Bank officials that outlines the full extent of the financial predicament the commonwealth is facing, NPR reported. In another effort to raise revenue, Garcia recently signed legislation raising the sales tax to 11.5 percent and creating a 4 percent tax on professional services.

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