Fri | Sep 22, 2017

Puerto Rico braces for lawsuits as major default looms

Published:Sunday | May 1, 2016 | 5:00 AM
Governor of Puerto Rico, Alejandro Garcia Padilla.

Puerto Rico's governor said on Friday that the United States territory is bracing for multiple lawsuits as a major default looms over a US$470 million bond payment.

Governor Alejandro Garcia Padilla said he would like judges to take Puerto Rico's economic and humanitarian crisis into account when ruling on the anticipated lawsuits.

"I hope the judges use their conscience," he told reporters.

Garcia said he has warned since last year that the government cannot afford to make the bond payment due on Sunday, which would be the island's largest default to date. More than US$422 million of that is for bonds issued by Puerto Rico's Government Development Bank (GDB), which is struggling as funds dwindle. The bank issues loans and oversees the island's debt transactions.

"May 1 is big because it may mean the end of the GDB," said Vicente Feliciano, an economist and business consultant in San Juan.

Under the bank's current state of emergency, only withdrawals to fund necessary health, public safety and education services are allowed. The bank also faces a suit filed earlier this month by hedge funds seeking to stop it from paying certain creditors and forgiving debt.

A default would also mean that Puerto Rico's access to capital markets would shut down, which would terminate the US$1.2 billion to US$1.4 billion in tax-revenue anticipation notes that the government issues yearly, economist Gustavo Velez said.

This in turn means the government would struggle to pay workers and suppliers and submit a new budget due soon.

"This default would formalise the gravity of the fiscal crisis that Puerto Rico faces," he said.

The anticipated default comes as Puerto Rico sputters through a decade-long economic slump and faces a US$70 billion public debt load which Garcia has said is unpayable and needs restructuring.

 

Delay

 

US legislators have delayed approving a bill that would provide Puerto Rico with a debt-restructuring mechanism and implement a fiscal control board. As action on that bill lagged, Garcia signed a bill into law that allows him to declare a debt moratorium if needed.

Many expect him to do just that on Monday if no deal is reached with bondholders.

But Feliciano warned that a moratorium will not fix the crisis.

"We need resolution," he said. "The longer this takes, the worse for the economy. There's a shrinking tax base, and there is less in the end to spread around."

Feliciano and other economists do not anticipate any immediate consequences besides lawsuits after the expected default, but if a court orders the government to pay creditors, it could force cuts to public services.

"There's no way around that," Feliciano said. "That's a real possibility."

Creditors have accused the government of exaggerating the crisis to avoid upcoming payments such as US$780 million due July 1, which includes general obligation bonds, which are guaranteed by the constitution.

Economists warn that a default on that payment would bring much bigger consequences for the US territory.

Congress headed out of Washington on Friday, missing deadlines on the budget and on helping Puerto Rico with its financial crisis.

Having blown a May 1 deadline to help the economically distressed territory,

lawmakers are now focusing on a July 1 deadline, when around US$2 billion in principal and interest payments become due. After Monday, the Puerto Rico government is expected to keep operating as usual, but economists warn that its access to capital markets will shut down and that eventually, this will curtail public services if a debt-restructuring mechanism is not approved.

A house bill would create a control board to help manage the island's US$70 billion debt and oversee debt restructuring. But the legislation has stalled in the Natural Resources Committee, as some conservatives and Democrats have objected to the approach.