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Puerto Rico can't pay US$72b debt - Governor

Published:Tuesday | June 30, 2015 | 12:00 AM
Governor of Puerto Rico, Alejandro Garcia Padilla.


The governor warned that Puerto Rico can't pay its US$72 billion public debt as international economists release a critical report on the island's economy, delivering another jolt to the recession-gripped United States (US) island as well as a world financial system already worrying over Greece's collapsing finances.

Governor Alejandro GarcÌa Padilla is hoping to defer debt payments while negotiating with creditors, spokesman Jes?s Manuel Ortiz said Sunday night.

GarcÌa is expected to air a pre-recorded televised address as legislators continue to debate a US$9.8 billion budget that calls for US$674 million in cuts and sets aside US$1.5 billion to help pay off the debt. The budget has to be approved by today, Tuesday.

Ortiz confirmed comments by GarcÌa that appeared in a report in The New York Times published late Sunday.

"There is no other option. I would love to have an easier option. This is not politics, this is math," GarcÌa is quoted as saying.

Puerto Rico's bonds were popular with US mutual funds because they were tax-free, but hedge funds and distressed-debt buyers began stepping in to buy up debt as the island's economy worsened and its credit rating dropped.

GarcÌa's comments are not likely to have much impact on Wall Street, said economist JosÈ Villamil, a former United Nations consultant and CEO of an economic and planning consulting firm.

"The markets are clear that Puerto Rico is heading to a direction of a restructuring or default," said the economist, adding that a voluntary restructuring by bondholders might be the best option.

"The last four administrations have kicked the can down the road," said Villamil. "At this point, there is no more can to kick. So we're going to take some very strict measures and some very profound measures. It's going to hurt, but there's no way out."

A report released Monday by a former World Bank chief economist and others found that Puerto Rico's fiscal debt is larger than originally thought and urged the government to act quickly.

"The government's cash balances can evaporate in the face of delays, reducing the room for manoeuvre and intensifying the crisis," the report stated.

Puerto Rico's constitution dictates that the debt has to be paid before any other financial obligation is met. If GarcÌa seeks to not pay the debt at all, it will require a referendum and a vote on a constitutional amendment, she said in a phone interview.

Puerto Rico's situation has drawn comparisons to Greece, where the government decreed over the weekend that banks would be shuttered for six business days and restrictions imposed on cash withdrawals. The country's five-year financial crisis has sparked questions about its continued membership in the 19-nation shared euro currency and the European Union.

Puerto Rico's governor recently confirmed that he had considered having his government seek permission from the US Congress to declare bankruptcy amid a nearly decade-long economic slump. His administration is currently pushing for the right for Puerto Rico's public agencies to file for bankruptcy under Chapter 9. Neither the agencies nor the island's government can file for bankruptcy under current US rules.

Puerto Rico's public agencies owe a large portion of the debt, with the power company alone owing some US$9 billion. The company is facing a restructuring as the government continues to negotiate with creditors as the deadline for a roughly US$400 million payment nears.

GarcÌa has taken several measures to help generate more government revenue, including signing legislation raising the sales tax to 11.5 per cent and creating a 4 per cent tax on professional services. The sales tax increase goes into effect Wednesday and the new services tax on October 1, to be followed by a transition to a value-added tax by April 1.