Puerto Rico Is Defaulting on $400 Million in Debt — And Congress Is on Vacation

Puerto Rico will default on nearly $400 million worth of government debt on Monday, the most significant non-payment yet on some $70 billion that the island still owes its creditors. Congress was supposed to finalize a bill last month to help the US territory solve its debt crisis, but legislators drafting the proposal left for vacation without taking action, and they won't be back on the job until next week at the earliest.

On Sunday, Puerto Rico Governor Alejandro Garcia Padilla said that the bulk of some $422 million owed by Puerto Rico's Government Development Bank wouldn't be paid on Monday. Last week, about $33 million of that debt, owned by Puerto Rican credit unions, was exchanged for debt payable in one year's time.

"Faced with the inability to meet the demands of our creditors and the needs of our people, I had to make a choice," Garcia Padilla said, adding that the money for the debt payment would instead be used to continue paying for social services on the island.

Though Monday's default is the most serious to date, things could get worse over the summer. On July 1, about $2 billion in payments are due, including $805 million in general obligation bonds, which are constitutionally protected and privileged under Puerto Rican law, but which officials have said must be fair game for restructuring. The governor has called the debt as it currently stands "unpayable."

"It's been pretty clear for the last months, and even for a couple of years back that Puerto Rico was going to default," said Orlando Sotomayor, professor of economics at the University of Puerto Rico. "Most people view the default as quite negative, and they are concerned, but I have a feeling that most people don't know what the consequences will be."

Puerto Rico is governed by US laws, but only has a single, non-voting member of Congress. A bill to address the debt crisis is currently stuck in the House Natural Resources Committee. Central to the bill would be the establishment of a fiscal oversight board with the power to override local elected officials, but also to initiate restructuring of the island's debt, which many bondholders oppose.

Anonymous conservative groups have spent hundreds of thousands of dollars in untraceable "dark money" on an advertising campaign that targets legislators in Washington and attempts to portray the bill as a "bailout" of Puerto Rico. It's widely believed that the campaign is financed by so-called "vulture funds," which have bought up a significant portion of Puerto Rico's debt on the cheap in the expectation that it will eventually pay back the full amount, even it means cutting worker pensions and social services.

According to congressional sources, some Republican legislators fell victim to the campaign, evidently without reading the bill itself. "If you look at some of the people who are vocal on our side…. some of their arguments are completely bogus," said one Republican congressional aide, who spoke on condition of anonymity in order to discuss the negotiations. The current bill does not include provisions that would use taxpayer money to pay Puerto Rican debt. The aide pointed out that "ironically," if the dark money groups were to succeed, the Obama administration might then be forced to do just what they claim to oppose and bail out the island.

"We do not want a bailout. We haven't asked for a bailout. We haven't been offered a bailout," said Garcia Padilla on Sunday. "A restructuring process will cost nothing to American taxpayers."

As Puerto Rico's crisis deepens, more and more residents are departing the island for US mainland, a trend that only further depletes its tax base. According to figures released by the territory's Institute of Statistics on Sunday, Puerto Rico lost 1.8 percent of its population in 2014 alone — the highest rate in the last decade. Some 84,000 people left Puerto Rico for elsewhere in the US that year, while only 20,000 travelled in the opposite direction. The institute's director said on Sunday that net out-migration was likely even higher in 2015.

Among those who are moving to the island are high-net-worth individuals and companies seeking to take advantage of recent last-gasp legislative measures that offer significant tax savings for those relocating. The average Puerto Rican, meanwhile, faces higher taxes on everyday items, including gasoline.

With a de facto July 1 deadline looming, there is hope in Puerto Rico that legislators in Washington will be able to reach a compromise before then. Republicans on the House Natural Resources Committee are being corralled by party leadership, which has repeatedly promised to help Puerto Rico.

"At this point we've seen a growing number of members of the Republican caucus understand that this is not a bailout," said Eric LeCompte, executive director of Jubilee USA, a coalition of faith based groups that work on debt relief, and has lobbied legislators in the capitol. "My sense is Congress will continue to move forward and we will see some legislation before the big default on July 1."

Sotomayor, the economics professor, said many Puerto Ricans are distrustful of local politicians, but likely would get behind a fiscal board — at least initially. "Most people put the blame on the local government," he said, but added that investors should have seen warning signs well in advance. "If you wanted to do your research you could have seen this was going to happen. In some sense there is blame to be shared between very bad policies on the part of Puerto Rico but also unwise lending that facilitated all this."

Follow Samuel Oakford on Twitter: @samueloakford

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