Puerto Rico default adds to island�s economic woes
AFP
AFP, SAN JUAN: Puerto Ricos default on a debt payment for the first time will leave the island closed out of the US financial markets, deepening what is already a serious economic crisis.
Governor Alejandro Garcia Padilla paid out just 628,000 dollars of $58 million in Puerto Rico Public Financing Corporation (PFC) debt that came due August 1, pleading a lack of liquidity in the recession-wracked US commonwealth.
The default impacts mainly Puerto Rican creditors, in particular the islands savings and loans. But some bonds were sold in the US market, and the governments failure to meet the debt payment is certain to impact its ability to raise funds in future, analysts say.
It closes the door to financing for the government and its corporations in the (US) market, Jose Joaquin Villamil, an analyst with Estudios Tecnicos in San Juan, told AFP.
This months missed payment is just the tip of a $72 billion dollar mountain of debt that Garcia Padilla has declared to be unpayable.
Debt ratings agencies had already downgraded Puerto Rico bonds to junk status, so what was already a difficult borrowing environment has just been made much worse.
Garcia Padilla, who is negotiating with creditors, is expected to present a restructuring plan by the end of the month.
The aim, he has said, is to rescue Puerto Rico from a vicious cycle of contraction, emigration, austerity and taxes.
Victor Suarez, the governors chief of staff, explained that the government defaulted on the PFC bonds because it needed to give priority to holders of government bonds, known as GOS, who are owed more than $100 million.
Meanwhile, the crisis is making life more difficult for the islands 3.5 million people. At 12.4 per cent, unemployment is more than double that on the US mainland, and a massive out-migration is underway, eating away at Puerto Ricos tax base.
The situation has been years in the making. The commonwealths finances were dealt a crippling blow in 2006 with the loss of federal tax breaks for US companies with operations on the island.
It has been in and out of recession in the eight years since. As economic activity shrank, the government papered over budget shortfalls with fresh borrowing.
Puerto Ricos savings and loans, the principal holders of Public Financing Corporation bonds, also have been weakened by the default, although their holdings are not large enough to threaten their survival, said Villamil.
The liquidity problem is real, and exists for many reasons, said Villamil.
In his view, the islands legislature is at least in part to blame for the crunch.
Last year, it approved a 16-cents a gallon (four cents a liter) gas tax, but rather than earmarking the added revenues for servicing the public debt, as the government intended, it diverted it to other spending.
The tax could have allowed Puerto Ricos highway authority to repay a $2.2 billion debt to the government development bank BGF, thereby averting the current crunch.
The legislature did approve an unpopular increase from seven per cent to 11.5 per cent in the sales tax, which went into effect July 1.
BGFs president, Melba Acosta, said Tuesday that the decision not to honor the debt obligations was due to both the liquidity problems and the governments need to maintain basic public services.
The White House has ruled out a financial bailout, and while it supports giving Puerto Rico the ability to seek bankruptcy protection to restructure its
debt, as Detroit has done, any decision to do so rests with the US Congress.
Opposition parties, meanwhile, decried the damage done to the islands image and reputation, which could take years to repair.
One should feel great shame. Puerto Ricos good name, its credit is tarnished, said Pedro Pierluisi, head of the New Progressive Party and the islands resident commissioner to the US Congress.
