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Puerto Rico is expected to default for the first time in history on Saturday, when the commonwealth misses its first debt due date: a $58 million payment on Public Finance Corporation (PFC) bonds.
Governor Alejandro Garcia Padilla shocked the nation in June when he called on creditors to postpone bond payments and restructure the U.S. territory's $72 billion in public debt. He said said the debt was "unpayable."
Puerto Rico's Chief of Staff Victor Suarez said earlier this week that the commonwealth did not have the current cash flow to pay bond holders. Many of the investors are Puerto Rican residents who sought a tax-free steady source of income.
The milestone is likely to cause panic over other debts that Puerto Rico may not pay in the future, and would also cast doubts over proposals to restructure its finances.
“The cash flow is delicate,” Suarez said, “We just don’t see having the money available to make the bond payment.”
Experts say failure to pay the debt will be another blow to the residents of Puerto Rico, who already have been shouldering the economic burden of their island.
“The real challenge with Puerto Rico is that most of the costs in their restructuring are going to be borne by Puerto Ricans, whether it’s ratepayers, taxpayers, service recipients or bondholders,” said Matt Fabian, partner at Concord, Mass.-based research firm Municipal Market Analytics, to the Wall Street Journal.
Fabian told the Journal that a default from Puerto Rico would be the largest in the history of the $3.7 trillion market for debt sold by U.S. state and local governments.
Daniel Rodriguez Collazo, executive president of Cooperatives Supervision and Insurance Corp., which regulates and insures the credit unions, expressed hope that the Puerto Rican government could find a last-minute way to make the bond payment.
Monday, Aug. 3, would be when it would be officially known if Puerto Rico defaults on its bond debt since payments that fall on a weekend can be made the next closest business day, according to published reports.
Suarez insists that missing the Aug. 1 payment would not be tantamount to defaulting, according to Reuters. But credit rating agencies such as Standard & Poor's and Moody’s say failure to pay on rated bonds on the day they’re due are a default in their view.
"It (would be) the first failure by the government to pay on a debt to public investors and indicates the weakness of the government's ability and willingness to pay," Reuters quoted Timothy Blake, managing director of Moody's Public Finance Group, as saying.
Puerto Rico is entering its ninth year in recession, and the administration of Gov. García Padilla has been pushing for the right of its public agencies to file for bankruptcy under Chapter 9, but the proposal has not drawn any Republican co-sponsors. Leading House Republicans have said they worry that allowing such access would not solve Puerto Rico's financial difficulties, and Garcia traveled to the U.S. to meet with legislators and Lew on the issue.
Puerto Rico has a 12.6 percent unemployment rate — twice that of the national average.
The increasing financial hardship on the island has led to the exodus of many people, many of them professionals. Many have settled in Florida, now home to nearly 1 million Puerto Ricans.
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