Puerto Rican Governor Alejandro Garcia Padilla announced that the government would not make nearly US$370 million in bond payments due yesterday after a failure to restructure or find a political solution to the US territory’s spiraling public debt crisis.
Garcia on Sunday said that he had issued an executive order suspending payments on debt owed by the island’s Government Development Bank, a default that is likely to prompt lawsuits from creditors and could be a prelude to a deadline to a much larger payment due July 1.
The governor said Puerto Rico could not pay the bonds without cutting essential services.
Photo: Bloomberg
Puerto Rican officials spent the weekend trying to negotiate a settlement that would have avoided the default, but apparently came up short. The development comes as the US Congress has so far been unable to pass a debt restructuring bill for Puerto Rico.
“Let me be very clear, this was a painful decision,” Garcia said in a speech. “We would have preferred to have had a legal framework to restructure our debts in an orderly manner.”
The Government Development Bank had US$422 million in payments due yesterday. Puerto Rico was to pay US$22 million interest and it reached a deal on Friday to restructure about US$30 million, leaving it short US$370 million.
The administration yesterday was also due to pay about US$50 million in other debt payments owed by various territorial agencies.
Nearly all the bonds are held by a variety of US hedge funds and mutual funds.
Garcia said the Puerto Rican 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.
“We will continue working to try to reach a consensual solution with our creditors,” he said. “That is one of our commitments, but what we will never do is put the lives and safety of our people in danger.”
The governor had been warning since last year that the island’s overall public debt of more than US$70 billion is unpayable.
Puerto Rico has been suffering through more than a decade of economic decline since the US Congress phased out tax cuts that had made the island a center for pharmaceutical and medical equipment manufacturing. Garcia’s predecessors and the island’s legislature borrowed heavily to cover budget deficits, causing a debt spiral that has already prompted several smaller defaults.
Creditors have accused the government of exaggerating the crisis to avoid upcoming payments of more than US$1 billion due on July 1 that includes general obligation bonds, which are guaranteed by the US constitution.
Economists have warned that a default of this magnitude could cause Puerto Rico to lose access to capital markets and make the situation worse as the government faces the much larger payment on July 1.
Garcia lashed out at US Congress for failing to pass a bill that would create a control board to help manage the island’s US$70 billion debt and to oversee some debt restructuring. He said it has been held up by “internal partisan and ideological divisions” in the US House of Representatives.
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