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Puerto Rico may face onslaught of lawsuits as default looms large

SAN JUAN, PUERTO RICO - JUNE 30:  Rosaura Guzman waits for customers at John Cafe a day after Puerto Rican Governor Alejandro Garcia Padilla gave a televised speech regarding the governments $72 billion debt on June 30, 2015 in San Juan, Puerto Rico.  The Governor said in his speech that the people will have to sacrifice and share in the responsibilities for pulling the island out of debt.  (Photo by Joe Raedle/Getty Images)

SAN JUAN, PUERTO RICO - JUNE 30: Rosaura Guzman waits for customers at John Cafe a day after Puerto Rican Governor Alejandro Garcia Padilla gave a televised speech regarding the governments $72 billion debt on June 30, 2015 in San Juan, Puerto Rico. The Governor said in his speech that the people will have to sacrifice and share in the responsibilities for pulling the island out of debt. (Photo by Joe Raedle/Getty Images)  (2015 Getty Images)

Puerto Rico's governor said Friday that the U.S. territory is bracing for multiple lawsuits as a major default looms over a $470 million bond payment.

Gov. Alejandro Garcia Padilla said he would like judges to take Puerto Rico's economic and humanitarian crisis into account when ruling on the anticipated lawsuits.

"I hope the judges use their conscience," he told reporters.

Garcia said he has warned since last year that the government cannot afford to make the bond payment due Sunday, which would be the island's largest default to date. More than $422 million of that is for bonds issued by Puerto Rico's Government Development Bank, which is struggling as funds dwindle. The bank issues loans and oversees the island's debt transactions.

"May 1 is big because it may mean the end of the GDB," said Vicente Feliciano, an economist and business consultant in San Juan.

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Under the bank's current state of emergency, only withdrawals to fund necessary health, public safety and education services are allowed. The bank also faces a suit filed earlier this month by hedge funds seeking to stop it from paying certain creditors and forgiving debt.

A default would mean that Puerto Rico's access to capital markets would shut down, which would terminate the $1.2 billion to $1.4 billion in tax revenue anticipation notes the government issues yearly, economist Gustavo Velez said.

This in turn means the government would struggle to pay workers and suppliers and submit a new budget due soon.

"This default would formalize the gravity of the fiscal crisis that Puerto Rico faces," Velez said.

Friday evening, officials announced a deal to pay down a small percentage of the overall debt. The Government Development Bank said it reached agreement with a group of credit unions to exchange some $33 million in notes due Monday for ones maturing May 2017.

The anticipated default comes as Puerto Rico sputters through a decade-long economic slump and faces a $70 billion public debt load that Garcia has said is unpayable and needs restructuring.

U.S. legislators have delayed approving a bill that would provide Puerto Rico with a debt-restructuring mechanism and implement a fiscal control board. As action on that bill lagged, Garcia signed a bill into law that allows him to declare a debt moratorium if needed.

Many expect him to do just that Monday if no deal is reached with bondholders.

But Feliciano warned that a moratorium will not fix the crisis.

"We need resolution," he said. "The longer this takes, the worse for the economy. There's a shrinking tax base and there is less in the end to spread around."

Feliciano and other economists do not anticipate any immediate consequences besides lawsuits after the expected default. But if a court orders the government to pay creditors, it could force cuts to public services.

"There's no way around that," Feliciano said. "That's a real possibility."

Creditors have accused the government of exaggerating the crisis to avoid upcoming payments such as $780 million due July 1 that includes general obligation bonds, which are guaranteed by the constitution.

Economists warn that a default on that payment would bring much bigger consequences for the U.S. territory.

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