Puerto Rico In Damage Control In Light Of 'Junk' Bond Downgrade; No Federal Bailout Expected

Puerto Rican officials on Wednesday rushed to propose new measures aimed at boosting the island's economy and appeasing bondholders a day after credit rating agency Standard & Poor's downgraded the U.S. territory's debt to "junk" status.

Meanwhile, a U.S. Treasury spokesperson said "there is no federal financial assistance being contemplated" for the island territory, the Wall Street Journal reported.

"We need to establish a new mechanism to regulate public spending."

— Rep. Maria Milagros Charbonier said.

Gov. Alejandro Garcia Padilla said he is renegotiating loans for which payments are now due earlier because of the downgrade, and he has ordered all government agencies to reduce their current budgets 2 percent, except for the island's education department. He also submitted legislation to cut an additional $170 million from the current budget, hoping to reduce the deficit to $75 million.

"Given the unprecedented fiscal situation that we find ourselves in, I'm sending this project to legislators and trust they will address it with the urgency it warrants," he said.

Garcia said he will also strengthen the liquidity of Puerto Rico's Government Development Bank, which decreased sales of new bonds late last year because of high interest rates.

He pledged to present a debt-free budget for the upcoming fiscal year as well as pursue private investment for new infrastructure projects, urging government agencies to speed up the development of such projects to help boost the economy.

Puerto Rico is entering its eighth year of recession while struggling with $70 billion in public debt accumulated over decades and a 15.4 percent unemployment rate, higher than any U.S. state.

Garcia said he would make other announcements in upcoming days to offset the fallout of S&P cutting the U.S. territory's rating one notch to "BB+," one level below investment grade. S&P said Tuesday's downgrade would have been greater if Garcia's administration had not taken steps to strengthen the economy, such as increasing taxes and authorizing changes to crumbling public pension systems.

Puerto Rico's bonds are popular with U.S. investors because they are exempt from federal, state and local taxes. Puerto Rican debt is held by roughly 70 percent of U.S. municipal mutual funds, according to Morningstar.

Amid Garcia's announcements, opposition legislators filed a bill to create a commission that would evaluate all fiscal measures approved by the governor, as well as analyze government agency budgets and the use of public funds.

"We need to establish a new mechanism to regulate public spending," Rep. Maria Milagros Charbonier said.

The downgrade, which will make it costlier for Puerto Rico to borrow money, comes as the island prepares to re-enter the bond market this month.

S&P's announcement did not have a substantial market impact on Puerto Rican bond prices Wednesday, in part because many investors had already anticipated the downgrade, said Alan Schankel, managing director of Janney Capital Markets in Philadelphia.

"I haven't seen any drastic movements," he said, adding that yields were a bit higher in some cases.

However, he warned that the market could change if more downgrades are announced. "It wouldn't surprise me if Moody's or Fitch followed suit soon," he said.

Moody's Investors Service warned in late December that it could downgrade Puerto Rico's debt, while Fitch Ratings issued a similar alert in November.

Based on reporting by the Associated Press.

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