Gov. Alejandro Garcia Padilla announced that Puerto Rico’s government will not make a $420 million bond payment due Monday, after a failure to negotiate a legal or political solution to the us territory’s public debt crisis. Economists have warned this default could cause Puerto Rico to lose access to capital markets and make the situation worse as the government faces the larger July payment.
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Island officials spent the weekend trying to negotiate a settlement that would have avoided the default.
“This was a painful decision”, the governor said in a televised speech Sunday, in which he struck a nationalistic tone and said he had to invoke his emergency powers under Puerto Rican law because help from Washington was not forthcoming.
He says in a news conference that the consequences will be severe if Congress does not restore the territory’s legal ability to restructure its debt under Chapter 9.
He said Puerto Rico’s government could not make the payment without sacrificing basic necessities for the island’s 3.5 million residents, including keeping schools and public hospitals open.
García slammed the U.S. Congress on Sunday for failing to agree upon assistance to Puerto Rico, which he blamed on ideological divides among lawmakers. A group of investors, mainly hedge funds, have bought distressed Puerto Rican debt betting that they can get higher payouts through regular courts than through U.S. Bankruptcy courts.
As a territory, Puerto Rico’s bonds were an attractive investment for those seeking to avoid paying taxes on the investment income.
The GDB default is the most significant yet in Puerto Rico, because the bank acts as the main depositary and liquidity source for public agencies like the island’s highway and infrastructure authorities.
“We have asked the US Congress time and time again to give us the tools to restructure our debts”, the governor said. “If the speaker gets a majority of Democrats to pass a bailout for Puerto Rico, I think that would be a political disaster”. It could also attract a much larger amount of payment by a dead line as soon as July 1.
Puerto Rico’s worsening debt crisis is dimming the economic outlook for the US territory and putting pressure on Congress to help resolve the situation but it is having little effect on the market for municipal bonds and most investors.
Some of these bonds coming due July 1 are what’s known as general obligation bonds, issued directly by Puerto Rico’s government and are constitutionally protected.
Meanwhile, the impasse on Capitol Hill has come down to one politically loaded word – “bailout”.
The $422 million is only a small chunk of the island’s $70 billion debt burden. But Puerto Rico is not getting any money as part of the deal, he said.
“We do not want a bailout. We need this restructuring mechanism now”.
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Residents of this former Spanish colony won by the USA in 1898 eventually were given a type of United States local government with a legislature and governor.
