Puerto Rico says island has no money available to make $58M bond payment

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Puerto Rico's government said Friday it would not make a $58 million bond payment due on the weekend and warned that the general fund will run out of liquidity by November if no action is taken.

Gubernatorial Chief of Staff Victor Suárez said at a news conference that the island's Public Finance Corporation could not meet the payment due Saturday.

"We don't have the money," he said, adding that the government still hopes to reach an agreement with creditors on renegotiating its debts.

Gov. Alejandro García Padilla warned several weeks ago that the government and state agencies cannot repay the $72 billion in public debt that hangs over the U.S. territory, which is struggling with a nearly decade-long economic slump.

Puerto Rican officials contend that failure to make Saturday's payment will not constitute a default because it involves moral obligation bonds, which means there is no legal requirement to repay them.

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But economists reject that argument.

"It is a default no matter how they try to disguise it," said Sergio Marxuach, policy director at the Center for the New Economy, a Puerto Rico-based think tank.

Marxuach and other economists said bondholders could file a lawsuit as soon as next week as a result of the nonpayment, which they said would be the first default in the history of the U.S. territory.

Justice Secretary César Miranda said his department has been preparing for such a scenario. "Obviously we have been anticipating lawsuits," he said.

U.S. open-end bond mutual funds together own more than $11.4 billion of Puerto Rico bonds, or just over 15 percent of its outstanding debt, according to a Morningstar report. Hedge funds hold roughly one-third of Puerto Rico's debt. But experts have said they don't expect Puerto Rico's problems to have a spillover effect on the broader municipal market.

Ben Eiler, a U.S. bond trader who lives in Puerto Rico, owns bonds held by the Public Financing Corporation but said he was not surprised by the government's actions.

"Everyone in the world believes they're going to default," he said in a phone interview. "I anticipated that."

Eiler said he expects the bond's price to rise after a restructuring is worked out.

A group formed by the government to initiate debt renegotiation discussions and submit a five-year fiscal reform plan by Aug. 30 has been meeting regularly, Suárez said. He said that so far, they have studied 59 proposals to boost Puerto Rico's economy, including welfare and labor reforms and public-private partnerships.

Suárez said the group also received information about the general fund's liquidity.

"If we don't take any action, we'll be in the red by November," he said.

Puerto Rico's Government Development Bank, which oversees the island's debt transactions, also is struggling with liquidity. However, bank president Melba Acosta said in a statement that the institution would meet a $169 million bond payment due Friday.

Garcia's administration has pushed for the right for Puerto Rico's public agencies to file for bankruptcy under Chapter 9, but the proposal has not drawn any Republican co-sponsors in the U.S. Congress. The White House has said that no federal bailout is planned.

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