Puerto Rico misses bond payment of $ 370 million
SAN JUAN, Puerto Rico — A spiraling Puerto Rico debt crisis reached a new milestone as the island missed nearly $ 370 million on a bond payment Monday and officials warned of worse to come if Congress doesn’t help it dig out from a mountain of debt.
The default was the largest in a series of missed payments by the struggling U. S. territory since last year, and Gov. Alejandro Garcia Padilla warned it was unlikely to be the last.
Puerto Rico has payments totaling nearly $ 2 billion due on July 1, including about $ 700 million in general obligation bonds that are supposed to be guaranteed under the island’s constitution. In a warning directed at Congress and creditors that include U. S. hedge funds, Garcia said the outlook for the next payment is bleak.
“We don’t anticipate having the money,” he told a news conference in the capital, San Juan.
The remedy, Garcia warned, is either a restructuring arrangement with creditors or legislation from Congress. U. S. lawmakers left for recess last week while a bill that would restore Puerto Rico’s legal authority to restructure, as states are able to do, and set up a fiscal control board was stalled in committee.
Garcia, who inherited the crisis when he took office in January 2013, blamed lobbying by “vulture” hedge funds and what he called “racist” attitudes toward Puerto Rico.
White House spokesman Josh Earnest said Monday’s default should be another red flag for Republicans in Congress. “This situation requires an urgent response and Republicans in Congress have been dragging their feet for too long,” Earnest said.
The White House has put forward a plan that would allow Puerto Rico’s government to restructure its debt and impose new oversight on finances, among other measures. Earnest said the oversight measures distinguish the proposal from a bailout — a charge Republicans have lodged against the plan. But, Earnest warned, continued delay in Congress “only makes a bailout more likely.”
After Monday’s default, Treasury Secretary Jacob Lew released a letter to House Speaker Paul Ryan, R- Wis., in which he urged him to work quickly to resolve the “few outstanding issues” on the legislation to help Puerto Rico. “Going forward, Puerto Rico’s $ 70 billion of debt is unsustainable by any measure. It simply cannot afford to pay its debt,” Lew said.
Lew warned that Puerto Rico may need a bailout if Congress doesn’t pass a bill that helps the island restructure its debt and prevents a series of “cascading defaults.”
“Unless Congress passes legislation that includes appropriate restructuring and oversight tools, a taxpayerfunded bailout may become the only legislative course available to address an escalating crisis,” Lew said in a letter to Congress posted Monday on the Treasury department’s website.
“With no orderly restructuring framework to address its debts, Puerto Rico will face a series of cascading defaults,” while litigation already under way will intensify and potentially take years to resolve, Lew wrote.
House Majority leader Kevin McCarthy, R- Calif., said last week he is “hopeful” to have a bill to address Puerto Rico pass by the July 1 payment deadline.
Rob Bishop, R- Utah, who as U. S. House Natural Resources chairman has been charged with forging a plan for the debt crisis, has said he won’t release a new version of his bill until the House is back in session next week. Sen. Bob Menendez, D- N. J., said that Republicans seem “content to watch the island burn,” while Democratic presidential candidate Hillary Clinton tweeted that Congress’ inaction “is irresponsible.”
A spokesman for Ryan, AshLee Strong, said “discussions continue” among the various parties involved in the legislation and praised Bishop for “crafting a solution to address Puerto Rico’s debt crisis in a timely and fiscally responsible way.”
$ 70B UNPAYABLE
Garcia has been warning since last year that the island’s overall public debt of more than $ 70 billion is unpayable. On Sunday, he announced the suspension of a payment on debt issued by the island’s Government Development Bank, a day before a scheduled $ 422 million was due on the bank’s $ 3.8 billion in debt.
Puerto Rico managed to reach a restructuring deal with island credit unions that shaved off about $ 30 million from the total due Monday, and paid $ 22 million in interest. But that still left it short nearly $ 370 million, and in default.
On Monday, the Government Development Bank said it tentatively rescheduled about $ 900 million of debt with a group of creditors willing to accept a 43.75 percent reduction in the face value of their bonds, and an exchange of their old bonds for new ones that won’t come due for some time. The creditors, who are known as the Ad Hoc Group and include several hedge funds, agreed to hold off on any legal actions related to the payments due Sunday and continue to negotiate the detailed terms.
But the deal would require 100 percent participation from other bondholders, Puerto Rican credit unions and other institutional investors. “Without federal restructuring legislation, including the tools to bind non- consenting creditors, the transaction would be highly unlikely to reach the required participation levels,” the bank said in a statement.
The default was expected to trigger investor lawsuits, though Puerto Rico Treasury Secretary Juan Zaragoza and Justice Secretary Cesar Miranda said before the news conference that none had been filed so far. It did not cause upheaval in U. S. financial markets, likely because the island’s economic troubles have been known for years.
Puerto Ricans have struggled through a decade of recession, cuts to public services, rising taxes and much higher unemployment than on the U. S. mainland, and it now stands at nearly 12 percent. Many on the island are anxious about the default, but agree there was little choice.
“If they pay the debt, they are going to cut health care and that’s what worries everybody,” said 83- year- old Jose Ugarte as he sat with friends discussing the implications in a plaza in Old San Juan. “This is a debt that isn’t ours. It belongs to [ former Govs.] Luis Fortuno and Pedro Rossello. Let them pay it.”
Puerto Rico has been suffering through more than a decade of economic decline since Congress phased out tax cuts that had made the island a center for pharmaceutical and medical equipment manufacturing. Garcia’s predecessors, with the acquiescence of the island legislature, borrowed heavily to cover budget deficits.
The total debt of the island of some 3.5 million people is greater than any U. S. state except much more heavily populated California and New York.