UPDATE 4-Puerto Rico insolvent, running out of cash -ex Detroit bankruptcy judge

30 Jun 2015 | Author: | No comments yet »

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

“The debt is not payable. 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.The White House on Monday suggested Congress consider allowing Puerto Rico’s public corporations to seek bankruptcy protection, vowing that the federal government wouldn’t bail out the troubled U.S. commonwealth. 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.

But we do remain committed to working with Puerto Rico and their leaders as they address the serious challenges, serious financial challenges, that are currently plaguing the Commonwealth of Puerto Rico,” Mr. 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.

Experts say the resulting fallout could impact the US economy. “Puerto Rico’s move could roil financial markets already dealing with the turmoil of the renewed debt crisis in Greece,” wrote Michael Fletcher for the Washington Post. “It also raises questions about the once-staid municipal bond market, which states and cities count on to pay upfront costs for public improvements such as roads, parks and hospitals.” Over the years, Puerto Rico’s bonds have been popular with US mutual fund investors because of their high yields and exemption from federal, state, and local taxes. 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. The island is a self-governing U.S. commonwealth; its residents are U.S. citizens but its government isn’t bound by many of the restrictions placed on state budgets and debt financing.

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. 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. 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. Puerto Rico doesn’t qualify for the purposes of chapter 9, leaving its heavily indebted municipal authorities, such as its electric utility, unable to restructure debt under that law.

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. Furthermore, Puerto Rico’s bonds are roughly eight times the value of Detroit’s, the largest American city ever to file for bankruptcy, meaning that a call for debt relief from such a behemoth could raise borrowing costs for other local governments as investors grow more cautious about lending. 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. Among the methods tried were raising taxes, cutting government employment, and reducing pensions, but these moves have failed to spark economic growth.

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. 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. 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.

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. Meanwhile, the island’s mound of debt also includes general-obligation bonds (bonds issued with the faith that the municipality will be able to pay it back through revenue raising), which its constitution says must be repaid before government workers receive their salaries. 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.

He is expected to seek concessions from creditors, including deferring some debt payments or extending the repayment schedule. “My administration is doing everything not to default,” Garcia Padilla told the Times. “But we have to make the economy grow. 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. 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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