Virtually out of cash and with its revenues fast deteriorating, Puerto Rico is moving toward default on $7 billion in loans owed by its public corporations to free up money to repay loans backed by the territory’s full faith and credit, Gov. Alejandro Garcia Padilla told a Senate hearing Tuesday.
The move allowed Puerto Rico to make a $355 million bond payment due today. Still, the financial gimmick, which violates the terms of some of those bond deals, only provides a short-term fix for the island’s liquidity problems. With at least $687 million in payments due on Jan. 1 and others to follow, it will only be a matter of time before Puerto Rico misses large payments on its $73 billion in outstanding debt, officials said.
“In simple terms we have begun to default on our debt in an effort to attempt to repay bonds issued with full faith and credit of the commonwealth and secure sufficient resources to protect the life, health, safety and welfare of the people of Puerto Rico,” Garcia Padilla told the Senate Judiciary Committee.
If Congress does not pass legislation to allow Puerto Rico to reorganize its debts in bankruptcy, Tuesday’s financial move will just be “the beginning of a very long and chaotic process” that will harm the island’s creditors and allow a budding humanitarian crisis on the island to grow out of control, the governor said.
The island was facing a Dec. 1 deadline to make a $355 million debt service payment, the vast majority of which was to make payments on bonds issued by the territory's Government Development Bank. The GDB paid the full amount, but only because Garcia Padilla signed an executive order allowing the commonwealth to redirect money that was earmarked to pay debt issued by its public corporations that oversee essential services such as power generation, water and sewer services and highways.
The “debt service payments reflect our commitment to honor our obligations notwithstanding the extreme fiscal challenges we face in an effort to facilitate a voluntary restructuring process with our creditors,” GDB President Melba Acosta Febo said in a statement. “However, make no mistake, Puerto Rico’s liquidity position is severely constrained at this time despite the extraordinary measures the government has taken to improve it.”
Puerto Rico has been mired in recession for a decade. The downturn has been accompanied by an acute fiscal crisis that has left the island deep in debt that the governor has called unpayable. The problems are now coming to a head, with the island beginning to default on its loans.
In recent years, the island’s government has gone to unusual lengths to cut spending and raise revenue. Pensions have been slashed, the government payroll has been reduced, and new taxes have been imposed. Still, the government continues to run large annual deficits that until recently were plugged by borrowing. The flagging economy and continued financial stress has in recent years prompted the biggest migration of Puerto Ricans to the mainland since the 1950s.
With Puerto Rico shut out of the capital markets, the crisis is reaching a breaking point. The island missed a small bond payment in August, and with other large payments coming due, officials have stepped up their efforts to persuade Congress to allow it to file for some sort of bankruptcy protection that would impose a legal structure that would compel creditors to join negotiations to reorganize the island’s debts.
Many creditor groups oppose allowing Puerto Rico’s debt to be reorganized in bankruptcy, saying that the government could do more to privatize public assets and otherwise raise revenue and reduce spending. Moreover, they argue, many investors would have eschewed investing in Puerto Rico if they knew the territory would retroactively be granted bankruptcy protection.
So far, that argument has carried the day in the GOP-led Congress, despite efforts from the Obama administration.
Puerto Rican officials insist that before long, they will have to choose between paying for essential services, such as police and fire protection and education, and repaying bond holders.
If it comes to that, they say, the island’s 3.5 million residents would come first and the island's debt would have to be settled in what promises to be a long, expensive and chaotic series of lawsuits that in the end would harm both creditors and the residents of Puerto Rico.
“We are already to the end of the road. There is no more runway. There are no more tricks,” Garcia Padilla said in an interview after the hearing, adding: “If I need to fight for Puerto Ricans, I will fight for Puerto Ricans.”