The Puerto Rican government's failure to reach an agreement with local bank Doral Financial could lead to declines in investment, GDP growth and revenue that far outweigh the cost of settling with the bank, said Doral advisor Robert Shapiro.
Doral reported on Tuesday that court-supervised negotiations with the treasury – over US$229mn in tax receivables allegedly owed to the bank – had broken down.
"It is an expensive proposition for Puerto Rico to renege on its agreements, and as a result, the government is squandering what little credibility it has left with investors," said Shapiro, former US Undersecretary of Commerce, in a report.
The treasury department was not immediately available for comment on the report.
Doral filed a lawsuit against the Puerto Rican government in June after the treasury allegedly cancelled an agreement to repay US$229mn in overpaid taxes.
Following the failure of negotiations, the two parties will resume their legal battle in a trial set for September 16-18.
"It is a disturbing trend and an unfortunate result because there could have been an amicable resolution to this matter," said Shapiro.
At end-April, regulators ruled that Doral could no longer include the tax receivables in its calculation of Tier 1 capital, forcing the lender to revise its capital plan and causing its share price to plummet 61% in a single day.
In June, the bank was classified as "undercapitalized" by the US Federal Deposit Insurance Corporation (FDIC), and the following month reached an agreement to sell residential and commercial assets worth approximately US$825mn to Abbey Finance Holdings.
Doral also revealed earlier this month that it received a subpoena from the US Securities and Exchange commission (SEC) related to an investigation into its 3Q13 regulatory filings.
Doral says conflict with Puerto Rico govt could impact economy
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