In the hours leading up to the official default, Puerto Rico Gov. Alejandro Garcia Padilla admitted that he had ordered officials from the island’s Government Development Bank not to make good on certain payments, sending the island into further debt and perhaps sparking the U.S. Congress to intervene.
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“This was a painful decision”, said Garcia Padilla.
Why can’t Puerto Rico go bankrupt like Detroit did? But some lawmakers are concerned about overriding Puerto Rico’s Constitution, or setting a precedent that deeply indebted states might one day try to follow. The U.S. territory, however, needs U.S. Congress to pass a restructuring bill for the island, but partisan politics have bogged down any movement on that measure.
This default is Puerto Rico’s third since 2015, and by far the largest. “It simply can not afford to pay its debt”. Yet, the island of Puerto Rico is being short-changed by their own government. It did not cause upheaval in USA financial markets, likely because the island’s economic troubles have been known for years.
Puerto Rico’s relationship with the US federal government is largely handled by the US Interior Department. Its debt levels have become so large that the government is unable to pay its debts and provide basic government services. It’s no coincidence that, having made such an investment, they advocate Chapter 9 bankruptcy as the remedy for the Puerto Rico’s debt crisis.
Such inaction not only hurts our fellow Americans of Puerto Rico, but also drags down the entire American economy as well.
In addition to skipping the nearly half-billion bond payments, the governor imposed a debt moratorium, so the island won’t put any more money toward its financial obligations, setting up potentially far-reaching defaults later this year.
Puerto Rico is governed by USA laws, but only has a single, non-voting member of Congress. A bill to address the debt crisis is now stuck in the House Natural Resources Committee. Many retirees and savers are owners of the bonds.
The commonwealth is dealing with roughly $70 billion in public debt and $46 billion in unfunded pension liabilities.
Puerto Rico’s next payment is due in July. There’s no taxpayer-funded rescue here, just the overdue creation of a process to stop the fiscal bleeding and restructure debt. But the legislation has not yet come up for a vote as some conservatives and Democrats have objected to the approach.
Padilla criticized Congress for lack of action regarding the us territory. The territory’s treasury secretary, Jacob Lew, wrote a letter to congressional leaders on Monday to ask for legislative help. Due to this priority of payment, other non-constitutionally protected issuers have already defaulted on their payments.
The island’s debt is held by mutual funds, hedge funds, bond insurers and individual investors, who were attracted in part by tax benefits and high yields.
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”.
Importantly, several Puerto Rican bonds are insured. The global economic downturn that started in 2007 only compounded the negative impacts on Puerto Rico.
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Experts say Monday’s default itself is unlikely to have a major effect on the broader bond market.
