The US needs to help pull Puerto Rico out of a “death spiral” the governor of the US island territory has said, after confirming that the country is unable to pay for its debts which stand at roughly $72 billion.
“The only way that we can climb out of this mire is if we come together and are willing - bondholders included - to assume shared sacrifices today, so that tomorrow we may all share the benefits of a growing economy,” said Alejandro Garcia Padilla, Governor of Puerto Rico, in a televised address on Monday.
He also called on the US to allow a bankruptcy and debt restructuring. However, the island did not receive a response it was expecting.
"There's no one in the administration or in US that's contemplating a federal bailout of Puerto Rico," said White House spokesman Josh Earnest at his daily news conference.
Puerto Rico’s governor requests that the commonwealth be allowed to restructure its debts under the US’ bankruptcy code. However, not being a municipality makes the island non-eligible for this.
Financial problems affecting Puerto Rico, a US commonwealth in the Caribbean, first emerged in the 1990’s when Washington began closing military bases on the island. In 2006 the expiry of corporate taxes in the US pushed manufacturing and pharmaceutical business out of the island, driving recession. To make matters worse, the island’s tax base slumped when worried residents migrated to the US as the economy worsened.
Standard & Poor’s (S&P) on Monday lowered Puerto Rico’s credit rating to CCC- from CCC+ and said that it has a negative outlook for the island.
"We believe the commonwealth's very weak liquidity and difficulty in obtaining external market access for cash flow financing raises the likelihood of a debt restructuring within the next six months," said S&P.
According to Garcia Padilla the 3.6 million people living on the island may face cuts in services if further reductions to government spending are imposed.
Moreover, he stated that creditors need to consider more favourable payment terms.
“We must make difficult decisions to meet the challenges we now know are ahead, and I intend to do everything in my power to lead us through this time,” he said.
Observers watching the crisis believe that the bailouts which rescued US states such as Detroit will not benefit the commonwealth. The only solution is a major restructuring, say economists.
Governor Padilla is currently establishing a working group to analyse the restructuring of public debt and by August 30 the Puerto Rico’s legislature is required to approve the plan. The governor’s main aim is to come up with a negotiated moratorium with bondholders to delay debt payments for a couple of years.
Puerto Rican officials are also in talks with creditors to avoid a possible default on a $416 million payment due on July 1. Overall, an outstanding debt of $9 billion is weighing down the island’s economy.
If obligatory payments are not met, the municipal bond market of the United States is also at risk as cities and states rely on returns to cover basic needs such as road construction and public hospitals.
News of the islands economic uncertainty has worried investors, triggering a fall in the price of Puerto Rico's benchmark general obligation bonds - which carry an 8 percent coupon and mature in 2035 - down nearly 10 percent to 69.510 cents on the dollar.