Puerto Rico’s governor believes the US territory’s US$72 billion public debt is unpayable, a spokesman confirmed late on Sunday, adding another blow to a world financial system already struggling with a possible default by Greece.
Governor Alejandro Garcia Padilla’s spokesman, Jesus Manuel Ortiz, confirmed that the Puerto Rican government is seeking to defer payments while negotiating with creditors.
He confirmed comments by Garcia Padilla that appeared in a report in the New York Times published late on Sunday, less than a day before the governor is scheduled to deliver a public address amid debate on a US$9.8 billion budget that calls for US$674 million in cuts and sets aside US$1.5 billion to help pay off the debt.
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The budget has to be approved by today.
“There is no other option. I would love to have an easier option. This is not politics, this is math,” Garcia Padilla is quoted as saying in the Times.
Puerto Rico’s bonds were popular with US mutual funds because they were tax-free, but hedge funds and distressed-debt buyers have been stepping in to buy up the debt as the island’s economy worsened and its credit rating dropped.
Puerto Rico’s constitution dictates that the debt has to be paid before any other financial obligation is met. If the governor seeks to not pay the debt at all, it will require a referendum and a vote on a constitutional amendment, said Puerto Rican Representative Jenniffer Gonzalez, spokeswoman for the main opposition party.
She said in a phone interview that she was taken aback by Garcia’s comments, which came out just hours before he was scheduled to meet with legislators.
“I think it’s irresponsible,” Gonzalez said. “He met privately with the New York Times last week, but he hasn’t met with the leaders of this island.”
Puerto Rico’s situation has drawn comparisons to Greece, where the government decreed this weekend that banks would be shuttered for six business days and restrictions imposed on cash withdrawals. The country’s five-year financial crisis has sparked questions about its continued membership in the 19-nation eurozone and the EU.
Garcia Padilla recently confirmed that he had considered having his government seek permission from the US Congress to declare bankruptcy amid a nearly decade-long economic slump.
His administration is currently pushing for the right for Puerto Rico’s public agencies to file for bankruptcy under Chapter 9.
Neither the agencies nor the island’s government can file for bankruptcy under current US rules.
Puerto Rico’s public agencies owe a large portion of the debt, with the power company alone owing about US$9 billion. The company is facing a restructuring as the government continues to negotiate with creditors as the deadline for a roughly US$400 million payment nears.
Garcia Padilla has taken several measures to help generate more government revenue, including signing legislation raising the sales tax to 11.5 percent and creating a 4 percent tax on professional services.
The sales tax increase goes into effect tomorrow and the new services tax on Oct. 1, to be followed by a transition to a value-added tax by April 1.
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