Puerto Rico’s Governor Says Island’s Debts Are ‘Not Payable’
Puerto
Rico’s governor, saying he needs to pull the island out of a “death
spiral,” has concluded that the commonwealth cannot pay its roughly $72
billion in debts, an admission that will probably have wide-reaching
financial repercussions.
The
governor, Alejandro García Padilla, and senior members of his staff
said in an interview last week that they would probably seek significant
concessions from as many as all of the island’s creditors, which could
include deferring some debt payments for as long as five years or
extending the timetable for repayment.
“The
debt is not payable,” Mr. García Padilla said. “There is no other
option. I would love to have an easier option. This is not politics,
this is math.”
It is a startling admission from the governor of an island of 3.6 million people, which has piled on more municipal bond debt per capita than any American state.
A broad restructuring by Puerto Rico sets the stage for an unprecedented test of the United States municipal bond market, which cities and states rely on to pay for their most basic needs, like road construction and public hospitals.
That market has already been shaken by municipal bankruptcies in Detroit; Stockton, Calif.; and elsewhere, which undercut assumptions that local governments in the United States would always pay back their debt.
Puerto
Rico’s bonds have a face value roughly eight times that of Detroit’s
bonds. Its call for debt relief on such a vast scale could raise
borrowing costs for other local governments as investors become more
wary of lending.
Perhaps
more important, much of Puerto Rico’s debt is widely held by individual
investors on the United States mainland, in mutual funds or other
investment accounts, and they may not be aware of it.
Puerto
Rico, as a commonwealth, does not have the option of bankruptcy. A
default on its debts would most likely leave the island, its creditors
and its residents in a legal and financial limbo that, like the debt
crisis in Greece, could take years to sort out.
Still,
Mr. García Padilla said that his government could not continue to
borrow money to address budget deficits while asking its residents,
already struggling with high rates of poverty and crime, to shoulder
most of the burden through tax increases and pension cuts.
He said creditors must now “share the sacrifices” that he has imposed on the island’s residents.
“If
they don’t come to the table, it will be bad for them,” said Mr. García
Padilla, who plans to speak about the fiscal crisis in a televised
address to Puerto Rico residents on Monday evening. “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.”
With
some creditors, the restructuring process is already underway. Late
last week, Puerto Rico officials and creditors of the island’s electric
power authority were close to a deal that would avoid a default on a
$416 million payment due on Wednesday.
With
other payment deadlines looming, Mr. García Padilla and his staff said
they would begin looking for possible concessions on all forms of
government debt.
The
central government must set aside about $93 million each month to pay
its general obligation bonds — a crucial action in Puerto Rico because
its constitution requires such bonds to be paid before any other
expense. No American state has restructured its general obligation debt
in living memory.
The
government’s Public Finance Corporation, which has issued bonds to
finance budget deficits in the past, owes $94 million on July 15. The
Government Development Bank — the commonwealth’s fiscal agent — must
repay $140 million of bond principal by Aug. 1.
“My
administration is doing everything not to default,” Mr. García Padilla
said. “But we have to make the economy grow,” he added. “If not, we will
be in a death spiral.”
A
proposed debt exchange, where creditors would replace their current
debt with new bonds with terms more favorable to Puerto Rico, signals a
significant shift for Mr. García Padilla, a member of the Popular
Democratic Party, who was elected in 2012. His party is aligned with the
Democrats on the mainland and favors maintaining the island’s legal
status as a commonwealth.
He
said that when he took office, he tried to balance the fiscal situation
through austerity measures and fresh borrowing. But he saw that the
island was caught in a vicious circle where it borrowed to balance the
budget, raised the debt and had an even bigger budget deficit the next
year.
Residents
began leaving for the mainland in droves, and Puerto Rico’s credit was
downgraded to junk, making borrowing extremely expensive.
Only
a few months ago, the administration was considering borrowing as much
as an additional $2.9 billion, which would be paid for by a fuel tax.
But
recently, Mr. García Padilla’s team has been laying the groundwork for
more drastic action. The governor commissioned a study of the financial
situation by former officials at the International Monetary Fund and the
World Bank. Concluding that the debt load is unsustainable, the report
suggests a bond exchange, with the new bonds carrying “a longer/lower
debt service profile,” according to a confidential copy reviewed by The
New York Times. The García Padilla administration made the report public on Monday.
“There
is no U.S. precedent for anything of this scale or scope,” according to
the report, one of whose writers was Anne O. Krueger, a former chief
economist at the World Bank and currently a research professor at the
School of Advanced International Studies at Johns Hopkins University.
The
“Krueger Report,” as it is being called, also seems aimed at the Obama
administration and Congress, both of which have taken a largely
hands-off approach to Puerto Rico’s fiscal problems. United States
Treasury officials, however, have been advising the island’s government
in recent months amid the worsening fiscal situation.
In
June, Puerto Rico hired Steven W. Rhodes, the retired federal judge who
oversaw Detroit’s bankruptcy case, as an adviser. The government is
also consulting with a group of bankers from Citigroup who advised
Detroit on a $1.5 billion debt exchange with certain creditors.
In
Washington, the García Padilla administration has been pushing for a
bill that would allow the island’s public corporations, like its
electrical power authority and water agency, to declare bankruptcy. Of
Puerto Rico’s $72 billion in bonds, roughly $25 billion were issued by
the public corporations.
Some
officials and advisers say Congress needs to go further and permit
Puerto Rico’s central government to file for bankruptcy — or risk chaos.
“There
are way too many creditors and way too many kinds of debt,” Mr. Rhodes
said in an interview. “They need Chapter 9 for the whole commonwealth.”
Hedge
funds holding billions of dollars of the island’s bonds at steep
discounts are frustrated that the government has not seemed willing to
reach a deal to borrow more money from them.
“We
want to be a part of the solution to the commonwealth’s fiscal
challenges,” a group of investment firms, including Centerbridge
Partners and Monarch Alternative Capital, wrote in a letter last week.
An
aide to the governor said the hedge funds’ debt proposal was too
onerous. And the deal would only postpone Puerto Rico’s inevitable
reckoning.
“It will kick the can,” Mr. García Padilla said. “I am not kicking the can.”
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