Alejandro Garcia Padilla had admitted that his government is not able to pay some $70 billion its borrowed to cover up years of irresponsible government spending and a shrinking population: According to a Pew report released in March, its population is 3.47 million in 2015, down 334,000 from 2000, or a 9 percent drop.
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Details are not yet settled, but investors expect that the Government Development Bank will be taken over by a “receiver”-a manager appointed by the stiffed creditors with a mandate to restore solvency or shutter the Government Development Bank, returning necessary functions to the Treasury of Puerto Rico”.
Members of the Committee of retired Teachers of Puerto Rico’s Teachers Federation protest.
Why does Puerto Rico have so much debt?
The total debt of the island of some 3.5 million people is greater than any US state except much more heavily populated California and NY.
Puerto Rico’s public services are mainly still functioning but some are concerned about a humanitarian crisis, including the Obama administration.
Last month, Dr Anne Schuchat, the Centers for Disease Control and Prevention (CDC) principal deputy director, warned that “there could be hundreds of thousands of cases of zika virus in Puerto Rico, and perhaps hundreds of affected babies”.
Since Puerto Rico is not a state, it is unable to access what’s known as Chapter 9 of the U.S. Bankruptcy Code.
We must not expect anything similar to the bailout bills offered during the financial crisis of 2008, since Congress left Washington last Friday, without a definite timeline for the process.
The White House has put forward a plan that would allow Puerto Rico’s government to restructure its debt and impose new oversight on finances, among other measures. Many on the island are anxious about the default, but agree there was little choice.
Puerto Rican residents are leaving the island in record numbers as the government defaults on its $70 billion of debt and its 10-year recession continues.
The commonwealth is expected to miss its upcoming $422 million bond payment for its Government Development Bank.
Creditors have accused the government of exaggerating the crisis to avoid upcoming payments of more than $1 billion due July 1 that includes general obligation bonds, which are guaranteed by the constitution. While waiting for Congress, some creditors have also been dickering with Puerto Rico over voluntary debt adjustments.
Remaining in legal and financial limbo would likely push the island’s economy into even steeper economic turmoil. Puerto Rico did pay $23 million, representing interest due, on Monday.
Importantly, the island did not default on all of the $422 million it owed to GDB creditors. But the legislation has not yet come up for a vote as some conservatives and Democrats have objected to the approach. The territory’s treasury secretary, Jacob Lew, wrote a letter to congressional leaders on Monday to ask for legislative help. “We would have preferred to have had a legal framework to restructure our debts in an orderly manner”, the Governor conceded.
Fact: Debt is not Puerto Rico’s biggest problem. Most bond funds have already sold their Puerto Rican debt, though a few still hold parts of the commonwealth’s debts and could be hurt. The island’s bonds were long popular because they are free of federal tax, making them an enticing option for municipal bond fund managers.
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The fund company Oppenheimer has exposure to Puerto Rican debt through its Rochester line of funds and Franklin Templeton has exposure through its Franklin Double Tax-Free Income Fund. Investors who own those mutual funds or individual bonds should talk with a wealth adviser. This market has been around for several decades, and is an important source of funding for public works.
