Business

Puerto Rico Must Restructure Debt To Avoid Death Spiral

The Commonwealth of Puerto Rico is at a crossroads. The governor, Alejandro García Padilla, noted in an interview late last week that the island simply could not pay all of its debts on time. He said that the government would therefore be asking for concessions from most if not all of its creditors, which could include deferring some debt payments for up to five years or the lengthening of repayment schedules.

García Padilla also announced he will outline his plans to deal with the crisis in an address to the people of Puerto Rico on Monday evening.

Puerto Rico

Statement from the Governor of Puerto Rico

“The debt is not payable,” García Padilla commented in the interview with the New York Times. “There is no other option. I would love to have an easier option. This is not politics, this is math.”

When discussing his plans to negotiate with creditors, he noted :“If they don’t come to the table, it will be bad for them. What will happen is that our economy will get into a worse situation and we’ll have less money to pay them. They will be shooting themselves in the foot.”

Puerto Rico

Avoiding a “death spiral”

“My administration is doing everything not to default,” García Padilla emphasized. “But we have to make the economy grow,” he added in justifying the request for concessions. “If not, we will be in a death spiral.”

More on Puerto Rico debt restructuring

The crux of the problem is the size of the debt. Analysts point out that with more than $72 billion in total debt, the island of 3.6 million people has more municipal bond debt per capita than any U.S. state.

A restructuring of Puerto Rican debt is a major test of the U.S. municipal bond market, which which is used by local governments rely on to pay for building roads, sewers and public hospitals.

Puerto Rico

We have already seen municipal bankruptcies in Detroit, Stockton and elsewhere, which have weakened the foundation of investor trust in the muni bond market, and a restructuring by Puerto Rico is another major blow to the market.

Puerto Rico’s bonds are worth more than eight times the bonds that were restructured in Detroit. Analysts point out that such a massive for debt relief on such is quite likely to raise borrowing costs for other local governments in the future as investors decide they need to be compensated more if there is a real risk that they will not be paid as agreed in the contract..

Another important consideration is that most of Puerto Rico’s debt is owned by individual investors on the United States mainland, in mutual funds, retirement or other accounts, and in many cases may not bed aware of what is actually going on..

Puerto Rico

Puerto Rico

Experts highlight that Puerto Rico does not have really the option of bankruptcy. A bond default would create a nearly unmanageable problem, with the island’s creditors and residents in a legal and financial limbo that would almost certainly take years to to finally get sorted out.

Whatever the legal circumstances may be, Governor García Padilla said that the commonwealth could not keep borrowing money to deal with budget deficits while asking residents already struggling with a great deal of poverty and crime to shoulder to deal with more tax increases and reductions in their pensions.

The governor also commented that creditors must “share the sacrifices” that he has imposed on the island’s residents.

Puerto Rico

Of note, in some cases the restructuring process has already begun. Knowledgeable sources say that government officials and creditors of the PREPA electric power authority have almost finalized a deal to prevent a default on a $416 million payment due Wednesday of this week.

Puerto Rico’s Public Finance Corporation (which issued bonds to finance budget deficits in the past) owes $94 million in bonds due on July 15th of this year. The Government Development Bank also has $140 million of bond principal due by August 1st

Given that several other bond payment deadlines are looming, García Padilla and his team said they were investigating the possibility of concessions on all forms of government debt.

Of interest, just a few months ago, Garcia Padilla’s administration had publicly stated that it was looking at borrowing another $2.9 billion that would be repaid via  a new fuel tax.

Puerto Rico

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