Puerto Rico comes closer to default

After surprising investors in June by announcing unmanageable debt of $72 billion, Puerto Rico moves closer to becoming first US territory to default

Photo by: Reuters
Photo by: Reuters

Puerto Rico's Governor Alejandro Garcia Padilla delivers his state of the Commonwealth address at the Capitol building in San Juan, Puerto Rico

Puerto Rico will miss a payment on debt due Aug. 1, the governor's chief of staff said on Friday, an event that will be considered a default by investors as the commonwealth lurches towards what could be one of the largest US municipal debt restructurings in history.

The missed payment will mark the first default by the commonwealth and shows the depth of the island's economic and cashflow problems. Puerto Rico Governor Alejandro Garcia Padilla shocked investors in June when he said the island's debt, totaling $72 billion, was unpayable and required restructuring.

According to a 2014 bond offering statement, Puerto Rico has never defaulted on the payment of principal or interest of debt.

"Tomorrow is August 1 and we don't have the money," Victor Suarez, chief of staff for Puerto Rico's governor, told journalists in San Juan, referring to a $58 million payment due on Public Finance Corporation (PFC) bonds.

"The PFC payment will not be made this weekend," Suarez said. "It was not consigned."

The island faces a number of debt payments due August 1 but had signaled in recent weeks that it may miss the PFC payment.

The non-payment would be the most notable since the city of Detroit, which had about $8 billion of bonds, defaulted on $1.45 billion of insured pension bonds before it filed for bankruptcy in 2013.

The looming default also indicates how cash-strapped the government is. Suarez said the government only had enough cash to operate until November if no additional measures are taken to increase cash flow.

The likelihood of a restructuring is leading investors to wonder how Puerto Rico will prioritise debt payments versus citizens' needs.