Puerto Rico governor seeks to delay debt payments
SAN JUAN, Puerto Rico -- Puerto Rico's governor said Monday night he will form a financial team to negotiate with bondholders on delaying debt payments and then restructuring $72 billion in public debt that he says the U.S. island can't repay.
Gov. Alejandro Garcia Padilla made the announcement just hours after international economists released a gloomy report on Puerto Rico's economy in another jolt to the recession-gripped U.S. island as well as a world financial system trying to avoid a collapse in Greece's finances.
Garcia said he would seek a repayment moratorium of several years but did not provide specifics.
"Even if we increase revenues and cut costs, the magnitude of the problem is such that we would not resolve anything given the weight of the debt we're dragging," he said. "The only way we'll get out of this hole is to join forces and agree, including bondholders, to assume some of the sacrifices."
The team has until Aug. 30 to develop an economic and financial reform plan that would require legislative approval.
Legislators are currently debating a $9.8 billion government budget that calls for $674 million in cuts and sets aside $1.5 billion to help pay down the debt. The budget has to be approved by Tuesday.
Garcia said urgent action is needed.
"The inherited debt is so big that it bars us from accessing the financial markets and our economy does not generate enough revenue to repay our obligations," he said.
Anne Krueger, a former World Bank chief economist who worked on the report commissioned by Garcia's administration, presented the findings to dozens of government officials ahead of Garcia's address.
"The situation is dire, and I mean really dire," she said.
Puerto Rico's bonds were popular with U.S. mutual funds because they are triple-tax exempt, 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.
Sergio Marxuach, policy director at the Puerto Rico-based consulting group Center for the New Economy, drew parallels between the economic problems in Greece and Puerto Rico.
"If we look at how the government operates, the lack of transparency of public finances, the bad quality of statistics, the massive tax evasion, the government corruption ... it's the same in Greece like in Puerto Rico," he said. "When it comes to the magnitude of the crisis, obviously Greece is at a much more complicated and deeper level ... and I hope we don't end up there."
The Greek government just shuttered banks for six business days and imposed restrictions on cash withdrawals. Greece's five-year financial crisis has sparked questions about its continued membership in the 19-nation shared euro currency and the European Union.
A report released Monday by Krueger and others found that Puerto Rico's public debt is larger than originally thought and urged the government to act quickly.
"This is a daunting agenda politically, legally and organizationally. It is also an urgent one: The government's cash balances can evaporate in the face of delays, reducing the room for maneuver and intensifying the crisis," the report said.
The economists praised Garcia's administration for taking action on higher taxes, pension reforms, spending cuts and freezes, but they also said revenue projections have systematically exceeded collections.
They added that policy failures have hurt Puerto Rico's economy, which has been in a recession for nearly nine years.
"Growth has not just been low, but output has actually been contracting for almost a decade now, which is remarkable for an economy suffering neither civil strife nor overt financial crisis," the report said.
Puerto Rico's treasury secretary, Juan Zaragoza, acknowledged that government revenue generated this year failed to meet expectations. "I'm not surprised that we have no money," he said.
Zaragoza called for a five- to seven-year plan to tackle the island's economic problems, but said Puerto Rico wouldn't necessarily adopt all the report's recommendations.
The number of U.S. mutual funds with exposure to Puerto Rican debt is relatively small, but not insignificant. The mutual fund analysis firm Morningstar estimates 377 out of 1,884 bond funds in the U.S. hold some Puerto Rican debt, with a face value of $11.33 billion. Four of the five biggest funds holding Puerto Rican debt are with the fund manager Oppenheimer, according to Morningstar.
The White House threw cold water Monday on the notion of bailing out Puerto Rico from its financial crisis, instead urging Congress to consider changing the law to permit the island's government and public agencies to declare bankruptcy. White House spokesman Josh Earnest said the federal government would provide financial expertise and access to existing resources.
"There's no one in the administration or in D.C. that's contemplating a federal bailout of Puerto Rico," Earnest said. "But we do remain committed to working with Puerto Rico and their leaders as they address the serious challenges."