The Cable

Puerto Rico Continues to Sink Into Bankruptcy With No Lifeline in Sight

There's no financial lifeline for Puerto Rico on the eve of a second debt default.

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Puerto Rican Governor Alejandro García Padilla made another damaging admission this week: on New Year’s Day, the island will default on nearly $174 million in principal and interest payments on debt. Even worse: six months after Padilla admitted Puerto Rico was going broke and unable to make $72 billion in bond payments, the U.S. commonwealth has no clear path to solvency.

In Washington, there are White House-backed bills in the House and Senate that would allow Puerto Rico to file for Chapter 9 bankruptcy protection, which would set up an orderly process for the island’s debtors to recoup some of what they had lent it in the first place. American cities like Detroit used Chapter 9 to emerge from bankruptcy. But because Puerto Rico is a commonwealth, not a municipality, it’s not eligible for this protection unless the new measure becomes law. So far, support for the legislation has been hard to generate.

“The bottom line is that neither Chapter 9 [normal municipal bankruptcy] nor Super Chapter 9 [a similar alternative] do anything to help Puerto Rico’s spending problems, which are the crux of the issue,” Taylor Foy, a spokesperson for Sen. Chuck Grassley (R-Iowa) said earlier this month. Grassley, chairman of the Senate Judiciary Committee, is one of the loudest opponents of providing Padilla with debt relief.

Federal Reserve chief Janet Yellen has also said the U.S. central bank is powerless to help Puerto Rico, whose economy has been plagued by years of population flight, anemic economic growth, and irresponsible government spending.

Perhaps Puerto Rico’s only financial lifeline is to come to a compromise with the Wall Street firms holding its debt. For year, municipal bond fund managers have been attracted to the island’s bonds because they are free of federal taxes.

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 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.

“We know that our creditors have spent a fortune lobbying against the people of Puerto Rico,” Padilla said in a speech Wednesday, adding creditors are “willing and anxious to initiate costly and disruptive litigation against the commonwealth, and attempt to attach and seize the little cash left in our accounts to obstruct our ability to provide essential services to our people.”

So far, those holding the island’s debt have only been willing to give Puerto Rico a minor “haircut,” meaning they would allow the commonwealth to pay less than what it borrowed. The island and its creditors came to a deal in July that allowed Puerto Rico do avoid default. They’ve were unable to come to a similar agreement in August, when Puerto Rico defaulted for the first time, nor at the new year.

“Puerto Rico’s government is starting to make choices between their obligation to their people and their obligation to those who hold debt‎,” Eric LeCompte, executive director, director of the religious development network Jubilee USA, said in a statement late Wednesday. “Unfortunately, without bankruptcy intervention or a negotiated solution, Puerto Rico’s financial crisis continues to worsen.”

If there is any silver lining to Puerto Rico’s default, it managed to pay some of what it owes on Jan. 1., defaulting on just two of the 13 payments it owes as the new year begins. This includes $329 million due to general obligation bondholders.

But even this payment is controversial, because Padilla was forced to raid revenues from the Highways & Transportation Authority, the Infrastructure Financing Authority, and the Convention Center District Authority bonds to make it. This means Padilla had to rob Peter to pay Paul, or raid his own island’s few sources of revenue to pay back its creditors.

Photo Credit: Christopher Gregory/Getty Images

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