While the world is watching to see if Europe will rescue Greece, the U.S. is contending with Puerto Rico, which is having its own set of financ
ial problems. The territory is struggling under $73 billion in debt and turning to the U.S. for help.
The Washington Post had these details in a story by Steven Mufson and Michael A. Fletcher:
Puerto Rico Gov. Alejandro García Padilla on Monday portrayed his territory’s economic condition as even more dire than previously revealed and in a televised address appealed to Washington to make unprecedented, “concrete” changes in bankruptcy rules to help rescue the island’s finances.
Groaning under at least $73 billion in debt, Puerto Rico — which is being called “America’s Greece” — is staggering down a path toward default, a scenario that could ripple across cities and states that depend on bonds for building everything from schools to stadiums.
“This is not about politics,” García Padilla said. “It’s about math.”
The territory’s plight is also a potentially explosive issue in Washington, where congressional Republicans mostly oppose any step that would allow Puerto Rico to seek bankruptcy protection to restructure its debts and clean up its fiscal mess. Meanwhile, the White House has offered only modest assistance in the roughly three years of crisis talks and has avoided taking any position on whether Puerto Rico could resort to bankruptcy for itself or its government-owned corporations.
The Reuters story by Megan Davies reported that Puerto Rico can’t declare bankruptcy:
Steven Rhodes, the retired U.S. bankruptcy judge who oversaw Detroit’s historic bankruptcy and has now been retained by Puerto Rico to help solve its problems, gave a blunt assessment on Monday.
Puerto Rico “urgently needs our help,” Rhodes said. “It can no longer pay its debts, it will soon run out of cash to operate, its residents and businesses will suffer,” he added.
Puerto Rico’s bonds skidded on Monday as investors sought greater compensation amid the heightened risk.
Puerto Rico is not eligible for debt restructuring under the U.S. bankruptcy code because it is not a municipality.
Rhodes said the island’s future hinges on gaining eligibility for debt restructuring, while stressing that bankruptcy would not be a “bailout.”
Bloomberg’s Michelle Kaske and Ezra Fieser wrote that bonds sunk to record lows as the territory tried to figure out how to service the debt:
Prices on some Puerto Rican bonds set record lows Monday. The island of 3.5 million people is grappling with a jobless rate double the national average and a debt load bigger than every U.S. state except California and New York.
The governor’s plan to ask bondholders to share in the island’s sacrifice came as investors are also weighing the possibility of a Greek default and exit from the euro zone. Garcia Padilla also proposed forming a fiscal board that would ensure the island adheres to its restructuring plan.
Puerto Rico, which has $13 billion of general obligation bonds, faces a $630 million payment on that debt July 1.
“It’s not that the debt will not be paid, it’s a matter of when Puerto Rico can pay,” House Speaker Jaime Perello told reporters in San Juan.
The next budget includes a $300 million fund to repay Government Development Bank debt, although the bank will need additional legislative approval to access most of that money, Perello said. The GDB, which lends to the commonwealth and its municipalities, is burning through its cash.
CNN Money’s Patrick Gillespie and Heather Long reported on Gov. Alejandro Garcia Padilla’s address to the nation:
“We cannot allow them to force us to choose between paying for our police, our teachers, our nurses, and paying our debt,” Padilla said in a televised announcement Monday night in Spanish. “We have to act now.”
Puerto Rico is running out of time. The island owes $73 billion that it can’t pay. Its debt is already junk grade and has one of the lowest possible ratings.
“Now is the moment for us to call on Washington for concrete action,” Padilla said, referring to the need to lobby Washington for change on Chapter 9.
The governor compared the island’s financial situation to Detroit’s, but unlike Detroit, Puerto Rico’s only option is to settle its debt with its creditors on its own, which would take years.
The first domino could fall on Wednesday when Puerto Rico’s government-run energy company, PREPA, has a debt payment due. PREPA almost certainly can’t make the payment and is likely to default. That could trigger other Puerto Rican bonds to default later this year.
But The New York Times story by Michael Corkery and Mary Williams Walsh said the debate could have political ramifications as well as financial:
But the federal response was relatively reserved on Monday. The White House made it clear that Puerto Rico would not receive a “federal bailout” but expressed some support for an effort to allow the island’s public corporations to use federal bankruptcy protections. As a United States commonwealth, Puerto Rico is not allowed to authorize bankruptcy, which means that impairing its debts could prove practically impossible.
But the push in Congress for Chapter 9 faces stiff opposition from many Republicans, particularly conservatives, who say that allowing Puerto Rico to restructure its debts in bankruptcy would amount to a free pass for decades of fiscal mismanagement by local government officials.
The debate could have significant ramifications for the 2016 presidential elections, particularly in the critical battleground state of Florida, which has a growing population of people who have left Puerto Rico. Many of these residents departed because of the declining economy but still have families there and stay engaged in local politics.
Greece is definitely bigger, but the debate of how to help Puerto Rico could have lasting consequences for those in politics in the U.S. It’s yet another place for investors to watch. One thing is certain, bond investors definitely stand to lose the most.
