Puerto Rico Governor Alejandro Padilla released a statement on Monday saying the governor said the island couldn’t pay its $72 billion in debts. The government of Puerto Rico failed its attempts at slashing expenditures and restructuring its debt. Former World Bank and International Monetary Fund released a report that acknowledged the true extent of the problem. Several massive payments are expected in the coming weeks. Padilla held a media conference for 5 p.m. addressing the situation.
Puerto Rico legislators are debating a $9.8 billion budget that calls for $674 million in cuts and sets aside $1.5 billion to help pay off the debt. The budget has to be approved by Tuesday. Puerto Rico’s bonds were popular with U.S. mutual funds because they were tax-free, but hedge funds and distressed-debt buyers began stepping in to buy up debt as the island’s economy worsened and its credit rating dropped. Economy experts including Jose Villamil, a former UN consultant and CEO of an economic and planning consulting firm believes that Padilla’s comments will not effect Wall Street.
“The markets are clear that Puerto Rico is heading to a direction of a restructuring or default,” said the economist, adding that a voluntary restructuring by bondholders might be the best option. “The last four administrations have kicked the can down the road,” said Villamil. “At this point, there is no more can to kick. So we’re going to take some very strict measures and some very profound measures. It’s going to hurt, but there’s no way out.”
The economists praised Garcia’s administration for taking action on higher taxes, pension reforms, spending cuts and freezes, but they also noted that anticipated revenue projections systematically exceed collections, and that policy failures have in part caused Puerto Rico to be cut off from market access. Puerto Rico’s Secretary Treasury Juan Zaragoza acknowledged that the government revenue generated this year had failed to meet expectations, and said “I’m not surprised that we have no money.”
Puerto Rico’s constitution dictates that the debt has to be paid before any other financial obligation is met. If Garcia seeks to not pay the debt at all, it will require a referendum and a vote on a constitutional amendment, she said in a phone interview with USA Today. White House Press Secretary Josh Earnest confirmed that the Treasury Department has been providing guidance to Puerto Rico and a task force is helping to indentify federal funds that it could benefit from. He has ruled out any kind of bailout for the island of 3.5 million people.
“There’s no one in the administration or in D.C. that’s contemplating a federal bailout of Puerto Rico,” Earnest said. “But we do remain committed to working with Puerto Rico and their leaders as they address the serious financial challenges.” The inability of the U.S. territory to repay its debt, combined with the financial crisis in Greece, would have far-reaching implications for financial markets and unsuspecting American investors.
Puerto Rico, which became a territory of the United States in 1898 after a war with Spain, cannot legally file for bankruptcy, as American cities like Detroit have done when faced with similar fiscal crises. David Chafey, chairman of the board of the Government Development Bank of Puerto Rico, announced his resignation last week. And on Monday, Padilla is expected to ask Puerto Rico’s creditors, and its residents, to “share the sacrifices” needed to get the island back on firm legal ground.