Garcia blamed lobbyists for hedge funds, which he blasted as “vultures”, for the fact that Congress left on its recess last week with a restructuring bill stalled in committee.
Advertisement
“Frankly the risk in Puerto Rico is that bonds aren’t cut enough initially to create a sustainable base”, added Municipal Market Analytics analyst Mark Fabian. Roughly a third of Puerto Rican tax revenue now goes to cover its debt.The island has been in an economic recession for a decade with the loss of manufacturing jobs and 2006 expiration of tax credits, known as Section 936, that exempted income from US firms located in USA territories.
In a statement late Sunday night, GDB said it reached “indicative terms” of a deal with the creditor group holding about a quarter of the almost $4 billion in bonds, under which the group would agree to a two-step debt exchange, ultimately recouping about 47 percent of what they are owed.
Island officials spent the weekend trying to negotiate a settlement that would have avoided the default. The difference being that Puerto Rico does not have the ability to declare bankruptcy and restructure its debt.
Padilla said that missing the payment was “a painful decision” that he wished he did not have a take. The territory’s treasury secretary, Jacob Lew, wrote a letter to congressional leaders on Monday to ask for legislative help.
Puerto Rico has also piled on such massive debt because of the attractive terms of the bonds they offered which are tax exempt in the 50 U.S. states. The bonds that Puerto Rico plans to default on May 1 are considered middle priority bonds, issued by a struggling entity known as the Government Development Bank. Puerto Rico paid only $22 million interest, and it reached a deal Friday to restructure about $30 million, leaving it short $370 million.
To cover budget shortfalls, the government borrowed heavily from mutual funds and hedge funds, and its debt levels ballooned to $72 billion.
Puerto Rico’s governor said they couldn’t make the payment without sacrificing basic necessities. The details of any such settlement are unknown, but while deliberations continued, the bank said, the creditors agreed to not sue over Monday’s missed payment. “That is one of our commitments”. “That is one of our commitments, but what we will never do is put the lives and safety of our people in danger”. According to the island’s governor, there was no way out but to suspend the debt payment in order to avert hurting the essential public services like medical care and schools.
And regardless of future side effects of the island’s bankruptcy on the overall USA economy, the United States government has “a shared responsibility” on Puerto Rico’s crisis, notes Caraballo-Cueto. “It just doesn’t have the mechanisms to restructure the debt that is weighing down on the island”. Congress, which previously opposed allowing Puerto Rico to use bankruptcy protections permitted for states, is now debating the issue as the deadline for another debt payment, this time for $2 billion, comes up on July 1. On Sunday the island’s Governor Alejandro García Padilla gave a televised address in which he announced the payment default and also warned the island would not have the funds to meet a $2 billion payment due on July 1. The development comes as Congress has so far been unable to pass a debt restructuring bill for Puerto Rico.
Advertisement
But in order to do so, the U.S. territory needs Congress to act, and Congress will not, for partisan political reasons, the governor said.
