Saying he was making a “tough decision”, Puerto Rican Gov. Alejandro García Padilla announced the island would not make a more than $400 million debt payment due today.
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The governor said in a speech Sunday that he has issued an executive order to withhold payment for most the amount due.
The default was confirmed by Governor Alejandro Garcia Padilla in a television address on Sunday.
A report published around the same time found that “structural problems, economic shocks and weak public finances have yielded a decade of stagnation, outmigration and debt” for the United States territory. This comes on the heels of missed payments over the previous year, and will be followed up by a $2 billion payment due on July 1, which it is also widely anticipated to miss. Its citizens can’t get many USA tax credits or federal food stamps.
“We don’t anticipate having the money”, Mr. Garcia Padilla told a news conference in San Juan. It paid interest but no principal Monday on those loans, though a group of credit unions agreed to forego $33 million of payments in exchange for new bonds that expire in a year. The parties are discussing preliminary terms for restructuring some of the GDB’s outstanding debt, including a plan that would reduce some debt obligations by roughly half.
As Puerto Rico took out more debt, it organized its bonds into increasingly complex vehicles that have a myriad of funding sources and legal structures.
The White House already has a road map for how to aid the island, and House Speaker Paul Ryan is trying to corral the Republican-led Congress into putting something together – to no avail, at least so far. As a result, another default is imminent as the island must make payments in July totaling almost $2 billion including $800 million in constitutionally guaranteed general obligation bonds.
Monday’s developments are the latest sign that a long-running economic crisis has reached an acute stage, embroiling financial markets and Congress. Benchmark Puerto Rican bond prices fell to near record lows Monday, with some investors paying less than 65 cents on the dollar for general obligation bonds maturing in 2035, an unusually low price. It was due to make a $422 million payment on Monday.
“If Congress fails to authorize a mechanism to restructure our debt, the 3.5 million American citizens who live in Puerto Rico will continue to suffer”, Garcia Padilla said.
“Unless Congress passes legislation that includes appropriate restructuring and oversight tools, a taxpayer-funded bailout may become the only legislative course available to address an escalating crisis”, Treasury Secretary Jack Lew said in a letter to Congress posted Monday on the Treasury department’s website. At the same time, it doesn’t have the same access to the annual churn of federal spending that stabilizes each state’s economy, and prevents them from getting too far out of sync with each other.
The island’s missed payment puts pressure on investors to negotiate a broad debt restructuring agreement and pressures Congress to act on legislation to help ease the country’s financial crisis. The first is for Congress to agree to pay off Puerto Rico’s debts-something that isn’t going to, and shouldn’t, happen.
By all accounts, population loss, an economic malaise, sky-high taxes, retiree costs, government bureaucracy and federal policies have conspired to undermine Puerto Rico’s finances. It doesn’t control its own currency, so it lacks the macroeconomic tools the US federal government has to stabilize the economy and fight recessions.
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“Over the past decade we’ve seen more mutual funds participate in the Puerto Rican bond market, because the higher-yield component appeals to some portfolio managers”, said Todd Rosenbluth, director of mutual fund and ETF research at S&P Capital IQ.
