The Puerto Rican government failed to pay nearly half of $2 billion in bond payments due Friday, marking the commonwealth’s first-ever default on its constitutionally guaranteed debt. Consequently, the government isn’t likely to pay any of the $779 million debt on general obligation bonds which due this Friday.
On Thursday Garcia Padilla authorized Puerto Rico, under a locally written debt moratorium law, to suspend some of the $2 billion in debt payments due on Friday. The motion said the funds hold more than $750 million in Government Development Bank debt, which Puerto Rico defaulted on in May.
In addition, Garcia Padilla also declared states of emergency at the island’s biggest public pension – the Commonwealth’s Employee Retirement System – which is more than 99 percent underfunded, as well as the University of Puerto Rico and other agencies.
Despite those measures, revenues in the operating account are expected to drop below some $95 million later this year.
“This is a dangerously low cash position for a government that funds services to millions of Puerto Ricans”, the bank said.
While the market already anticipated the default, it affects the credibility of a territory grappling with $70 billion in public debt, economist Jose Villamil warned.
“This has enormous consequences”, he said.
SAN JUAN, Puerto Rico – Porfirio Guerrero has grown increasingly frustrated as a decade-long recession has sapped business from his tailor shop in the Puerto Rican capital.
President Barack Obama signed legislation Thursday that addressed the island’s debt crisis but didn’t provide any mechanism to avoid Friday’s default. Many of those investors were particularly attracted by Puerto Rico’s general obligation bonds due to their constitutional guarantee of repayment. A federal oversight board is getting ready to oversee the island’s finances amid a dire economic crisis. The new law also allows Puerto Rico to temporarily lower the federal minimum wage for some younger workers. “It was a good thing they passed PROMESA, even at the eleventh hour”, Ted Hampton, senior credit officer at Moody’s Investors Service, said, referring to the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA).
“We’ve got to keep on working to figure out how we promote the long-term growth and sustainability that’s so desperately needed down there, but the people of Puerto Rico need to know that they are not forgotten, that they are part of the American family”, President Obama said. However, the control board might eventually implement austerity measures that could lead to government layoffs and affect services, he said.
But Padilla told reporters on Friday afternoon that Puerto Rico would not pay a total of $911 million in interest and principal payments so it could maintain essential services for residents.
Hiram Rivera-Baez, 50, who sews the final trouser seams on uniforms, said his son-in-law left for Texas five years ago to start an air-conditioning business.
“We’re doing what’s right for Puerto Rico”, he said.
“We’re businesses trying to get the economy moving, and we’re not able to do it”, Ferdman said.
Information for this article was contributed by Danica Coto and Mary Clare Jalonick of The Associated Press and by Steven Mufson of The Washington Post.
Gov. Padilla: ‘Puerto Rico will now govern itself like an Adult
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