Puerto Rico will skirt a catastrophic default on the vast majority of more than $1 billion in bond payments due in early January, an outcome that required island officials to raid cash set aside to pay other debts.
The financial maneuvers will allow the cash-strapped territory to escape default on all but $37.3 million owed to creditors, a relatively small default that marks the second time since August that it will have missed a bond payment.
The moves allow Puerto Rico to buy time as officials hope Congress will help restructure its staggering debt burden. But with the island suffering from a decade-long recession that has shrunk tax revenue and ignited a large migration to the mainland, officials said major defaults loom in May unless lawmakers give the territory an orderly process for restructuring its debt.
“The use of over $100 million in reserved funds to make debt service payments for several of the Commonwealth’s issuers should underscore that the Commonwealth is running out of options to pay its debt,” Melba Acosta Febo, president of Puerto Rico’s Government Development Bank, said in a statement.
As a territory, Puerto Rico lacks the option of bankruptcy that has been used successfully in cities and counties grappling with suffocating debt, including Detroit, Vallejo, Calif., and Jefferson County, Ala.
The Treasury Department has joined with Puerto Rican officials to press members of Congress to pass legislation enabling the commonwealth to seek Chapter 9 protection from creditors or create a financial control board that would have enough authority to coerce recalcitrant bondholders to join a restructuring plan.
“Today’s announcement that Puerto Rico will miss additional payments demonstrates the gravity of the Commonwealth’s fiscal crisis and the need for Congress to act now,” a Treasury spokesman said in a statement Wednesday. “Puerto Rico is at a dead end, shifting funds from one creditor to pay another and diverting money from already-depleted pension funds to pay both current bills and debt service.”
Congressional Republicans generally have opposed granting a bankruptcy option to Puerto Rico, which some members liken to a bailout even though it would not cost any taxpayer money. Others want Puerto Rico — which has slashed public pensions, cut jobs, and withheld income tax refunds to stay afloat financially — to do more to trim spending and free money to pay creditors.
Still, House Speaker Paul D. Ryan (R-Wis.) has said that the House would work to craft a legislative package by the end of March to deal with Puerto Rico’s financial problems — a pledge that has left some Puerto Rican leaders cold.
“These payments are due now,” Puerto Rico Gov. Alejandro Garcia Padilla said in a speech Wednesday.
In late June, Garcia Padilla called the territory’s more than $70 billion debt “unpayable.” The debt had mounted over the years as a succession of leaders relied on loans to plug increasing budget shortfalls. The cycle of deficits and borrowing was exacerbated by the fact that Puerto Rican bonds were long seen as attractive because money that investors earned on them is shielded from federal, state and local taxes.
The island’s economy has been in free fall since 2006 when a lucrative tax break that lured manufacturers was phased out. Now, just 40 percent of adults in Puerto Rico are in the labor force. Unemployment has been in double digits for the past 15 years. The bleak economy has caused the largest migration of Puerto Ricans to the mainland since the 1950s.