Puerto Rico failed to make a $58 million bond payment in full on Monday, sending the US territory into default a month after its governor declared that the roughly $72 billion in public debt that it owes was not payable.
Melba Acosta Febo, the president of the Government Development Bank for Puerto Rico, said in a statement that the territory's legislature had not appropriated enough funds to pay the service on its Public Finance Corporation bonds. Using what little money was available, Febo said that the PFC paid a token amount — roughly $628,000 — of the $58 million that was due to investors on Monday.
"This was a decision that reflects the serious concerns about the commonwealth's liquidity in combination with the balance of obligations to our creditors and the equally important obligations to the people of Puerto Rico to ensure the essential services they deserve are maintained," Acosta said in a statement.
Though Puerto Rico fulfilled several debt payments following Gov. Alejandro García Padilla's announcement in late June, officials made clear that continuing to do so across all its debts without restructuring them was, in their view, impossible. PREPA, the island's heavily indebted electric power authority, was only able to meet a $400 million payment in early July by borrowing from bond insurers who stood to have their policies triggered by a default — an unorthodox and desperate means of kicking the can down the road.
Monday's default on the PFC bonds is likely to add urgency to the government's stated intention to restructure, possibly by lowering interest rates or drawing out maturities over more years, giving the island more time to pay. Many investors, including a vocal set of hedge funds that have swooped in to buy the island's debt in recent years, oppose such measures and claim that the island can in fact pay its bonds on time.
A hedge fund-financed study last week determined that Puerto Rico could avoid default in part by severely cutting public spending on expenditures like education and Medicaid benefits. Government officials downplayed the hedge fund report, which they said prescribed austerity beyond what they have already employed, and which would only worsen the island's plight.
Both a cause and symptom of Puerto Rico's economic crisis has been a mass exodus of its residents in recent years to the mainland United States, shrinking the island's population to just 3.5 million. Conditions for those who remain have grown increasingly dire. More than 40 percent of the island's residents live below the poverty line, and Puerto Rico's 12.4 percent unemployment rate is more than double the overall figure in the US.
But even these numbers underplay the level of malaise on the island — because so few are looking for work, or work in grey areas of the economy, only around 40 percent of working-age adults are officially employed.
A government-commissioned report chaired by former IMF official Anne Krueger that was issued in conjunction with García Padilla's announcement suggested that Puerto Rico's debt spiral would only worsen without concessions from bondholders.
Because Monday's default only concerned the legislature-backed PFC bonds, it appeared that the government was attempting to prioritize certain payments as it attempts to broker negotiations with its lenders. Other bonds, such as those backed by tax revenues, offer bondholders greater legal recourse in the event of a default.
Unlike in the US, Puerto Rico's municipalities and public corporations cannot file for Chapter Nine bankruptcy protection, a capability that its leaders have called on Congress to provide. Bills that would establish this have been introduced in both the House and Senate, but face likely opposition.
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