Date
23 March 2017
Analysts say there is still a danger that Puerto Rico may default on all or part of the bonds issued by its financing arm, the Government Development Bank. Photo: Reuters
Analysts say there is still a danger that Puerto Rico may default on all or part of the bonds issued by its financing arm, the Government Development Bank. Photo: Reuters

Puerto Rico avoids second default, but future payments uncertain

Puerto Rico made a crucial debt payment on Tuesday but warned that its deteriorating finances could trigger future defaults.

Meanwhile, Governor Alejandro Garcia Padilla granted the US territory power to take revenues from public agencies, Reuters reported.

There had been speculation Puerto Rico would default on all or part of the US$355 million notes issued by its financing arm, the Government Development Bank.

The US territory said in a statement that it made the Dec. 1 bond payment despite “extreme fiscal challenges”, the news agency said.

Puerto Rico first defaulted in August, but failure to make the payment on Tuesday would have been more significant because part of that debt was protected by the commonwealth’s constitution.

Another default could have triggered lawsuits, further spooked investors and undermined the island’s efforts to climb out of US$72 billion in debt and forced it to take drastic measures to keep public services running.

But Moody’s said the ratings agency would “continue to view default as likely on future commonwealth debt payments”.

Puerto Rico’s next deadline is US$945 million in total bond payments on Jan. 1, including US$363 million in general obligation debt service, Moody’s said.

A Puerto Rico executive order signed on Monday by Garcia Padilla said it gives the commonwealth the ability to claw back revenues from certain government agencies, including the highway authority HTA and the infrastructure authority PRIFA.

Garcia Padilla told a US Senate Judiciary Committee that Puerto Rico would have to “claw back revenues pledged to certain bonds issued in order to maintain public services” and to repay bonds issued with the full faith and credit of the commonwealth.

An imminent default “looms large”, he said.

“In simple terms, we have begun to default on our debt in an effort to attempt to repay bonds issued with the full faith and credit of the commonwealth and secure sufficient resources to protect the life, health, safety and welfare of the people of Puerto Rico,” the governor said in written testimony.

Justice Secretary Cesar Miranda said that the clawbacks “could be interpreted as a technical default, in the way that we retain money destined to eventually pay a debt when due” and said it could open the door to litigation.

About 45 percent of the territory’s 3.5 million people are mired in poverty. Years of over-spending and the expiration of corporate tax incentives stuck it with debt that gets harder to pay as residents increasingly emigrate to the United States, the report said.

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CG

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