The missed payment is the biggest yet in a continuing series of defaults by the struggling US territory, and a warning that Puerto Rico will probably default on even larger and more consequential payments due July 1, unless Congress enacts rescue legislation before then.
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Puerto Rico’s financial crisis deepened Sunday as Governor Alejandro Garcia Padilla announced the U.S. commonwealth would default on $422 million in debt. Gov. Alejandro Garcia Padilla said “Let me be very clear, this was a painful decision.”He mentioned that the government is not in a situation to pay the entire amount without sacrificing the basic necessities of the island’s residents which is about 3.5 million”. Garcia Padilla said he would welcome oversight that assisted the island’s elected government but would strongly oppose any federal oversight board that could overrule the government on matters like taxation, or on which creditors ought to be paid first.
And regardless of future side effects of the island’s bankruptcy on the overall United States economy, the U.S. government has “a shared responsibility” on Puerto Rico’s crisis, notes Caraballo-Cueto. Congress will not enact a “bailout”, meaning an infusion of US taxpayers’ money. Puerto Rico has a $44 billion unfunded pension liability.
These personal hardships along with others have led to Puerto Rico’s largest mass exodus in the last 50 years.
A GDB default could escalate Puerto Rico’s crisis because the GDB plays such an essential role in keeping cash flowing on the island, said Matt Fabian, a partner at Municipal Market Analytics.
“Frankly the risk in Puerto Rico is that bonds aren’t cut enough initially to create a sustainable base”, he said. We haven’t asked for a bailout.
The default ratchets up pressure on Congress to find a legislative solution for Puerto Rico, which owes another $1.9 billion of debt on July 1, including about $777 million in general obligation debt backed by its constitution. Moody’s Investors Service analysts said last week that any non-payment, even if it’s agreed to by creditors, constitutes a default in their eyes.
Most bond funds have already sold their Puerto Rican debt, and it’s now mostly owned by hedge funds.
Before Congress left Washington Friday for a weeklong recess, legislators were deadlocked over any plan that could be seen as similar to bailout bills of the 2008 financial crisis. Although García Padilla has pressed for access to Chapter 9, the concept is combustible on Wall Street since investors lent money to the island when bankruptcy was not an option.
“We can’t wait longer”, he said. “So to say it’s a bailout, it’s obviously not just a stretch of the meaning of the word, there has to [be] an ulterior motive”. “We want a process to restructure, which won’t cost U.S. taxpayers anything”.
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And so Padilla’s announcement on Sunday, while not entirely unexpected, does reinforce the position from which the island will continue negotiations with its creditors over this specific debt. The global economic downturn that started in 2007 only compounded the negative impacts on Puerto Rico.
