The Cable

Puerto Rico’s Financial Pain Is Only Getting Worse From Here

Puerto Rico defaulted on what amounts to a drop in the bucket of what it ultimately owes.

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Puerto Rico officially went into default on $422 million in loans Monday. But financial hardship there is just getting started.

The cash-strapped U.S. commonwealth owes $2 billion on July 1. This includes an $805 million payment on its general-obligation bonds, guaranteed under the island’s constitution to be paid before anything else. In total, Puerto Rico Gov. Alejandro Garcia Padilla had admitted that his government is not able to pay some $70 billion it has borrowed to cover up years of irresponsible government spending and a shrinking population: According to a Pew Research Center report released in March, Puerto Rico’s population is 3.47 million in 2015, down 334,000 from 2000, or a 9 percent drop. Seventy-five percent of this loss has occurred since 2010. This continues the largest emigration in more than 50 years, Pew found.

“While this default is significant, all eyes are now on the island’s July payment,” Eric LeCompte, executive director of the religious development coalition Jubilee USA, said in a statement Monday. “The July payment is for bonds protected in the constitution. Some of the holders of this kind of debt argue they should be paid before other creditors, pensions, or social services.” 

LeCompte called on Congress to pass legislation giving Puerto Rico something similar to Chapter 9 bankruptcy protection, which would set up an orderly process for creditors to get paid back some of what they’re owed. At the start of the year, House Speaker Paul Ryan (R-Wis.) gave lawmakers three months to come up with a solution to help the island, home to a population with a 45 percent poverty rate, a deadline that’s been blown. Bills in the Senate and House have stalled.

This means Padilla has increasingly dwindling options for navigating his way out of the crisis. A restructuring of Puerto Rico’s $70 billion in debt would be the biggest ever in the $3.7 trillion municipal bond market. State and local governments rely on these loans to raise cash to pay for operating.

“We have known for months now that Puerto Rico’s debt is simply unsustainable, yet congressional Republicans continue to sit on their hands — content to watch the island burn,” Sen. Bob Menendez (D-N.J.) said Monday.

Wall Street creditors have already taken Puerto Rico to court to get back some of what they’re owed. The island’s bonds were long popular because they are free of federal tax, making them an enticing option for municipal bond fund managers. Now, they risk watching the value of the loans they hold disappear.

Firms like Franklin Templeton and OppenheimerFunds together hold about $5 billion in Puerto Rican bonds. Hedge funds like Stone Lion Capital Partners and Knighthead Capital Management also are big holders of San Juan’s plummeting bonds. Bond insurers, including MBIA and Assured Guaranty, are also in line for losses if Padilla can’t find a way to pay his bills.

The onset of the Zika virus just makes the debt crisis all the worse. The Centers for Disease Control and Prevention estimates that Zika will infect 20 percent of Puerto Ricans on the island by the end of 2016. The virus, which causes birth defects, is spread by mosquitoes and sexual contact. Padilla said that without help, his government would not be able to stop it.

Photo credit: SPENCER PLATT/Getty Images

David Francis was a senior reporter for Foreign Policy, where he covered international finance. @davidcfrancis

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