Puerto Rico Governor Alejandro Garcia Padilla declared a moratorium on debt payments a day before $2 billion are due, promising its biggest default yet, as President Barack Obama signed a rescue package for the financially strapped territory.
Friday’s default will mark the first time the U.S. territory has failed to pay on its $13 billion of general obligation bonds, which the island’s constitution says must be paid before other expenses.
Padilla made the announcement as Obama signed legislation to install federal oversight of Puerto Rico and extend it the power to cut debts in court, potentially strengthening the commonwealth’s ability to wrest concessions from recalcitrant investors.
Obama said there is still tough work to do to get Puerto Rico out of the hole. “But it is an important first step on the path of creating more stability, better services and greater prosperity over the long term for the people of Puerto Rico,” Obama said as he signed the bill in the Oval Office.
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The default comes one year after Garcia Padilla said the island was unable to repay all that it borrowed to keep the government afloat as the economy remains mired in a recession. The governor in August began skipping payments on some securities with the weakest legal pledges, seeking to avert cuts to schools, policing and health care that he said would extract a heavy toll on the island territory, where nearly half of the 3.5 million residents live in poverty.
Thursday Garcia also signed executive orders that expand a state of emergency to four other government agencies, including the island’s largest public university and a retirement system that has been shorted by $40 billion.
“These measures are reasonable and necessary to ensure essential services while the debt is restructured under the legal framework provided by PROMESA,” he said, referring to the acronym for the bill that Obama signed Thursday.
Puerto Rico’s crisis has been steadily building, with the economy continuing to shrink and the government effectively locked out of the bond market, where it routinely sold debt to paper over budget shortfalls. The concern about the consequences of the July 1 default triggered rare bi-partisan action on Capitol Hill, a step lawmakers decided was needed to avoid a financial bailout later.
That law, which cleared the Senate Wednesday, doesn’t provide any additional funds to Puerto Rico. Rather, it allows for the creation of a federally appointed control board to oversee the commonwealth’s budget and any debt reduction, which can now be enforced by a court, similar to a municipal bankruptcy. It also places a stay on lawsuits in the meantime, preventing a judge from ordering the island to make investors whole regardless of the cost to residents.
With the prospect of an orderly resolution, Puerto Rico bond prices have rebounded from lows. The S&P Puerto Rico bond index has risen for the past 23 days, the longest winning streak since 2012, to the highest since Garcia Padilla’s announcement last year that the government’s obligations were too much to pay.
Puerto Rico’s default would be the first payment failure from a state-level borrower on debt backed by the full power to raise taxes since Arkansas in 1933. Because the commonwealth’s crisis is unique, there hasn’t been any broader impacts on the municipal-bond market, a haven where prices have been rising as money floods into the safest assets.
While Garcia Padilla has said the commonwealth doesn’t have enough money to pay investors in full and keep crucial essential services in place, Puerto Rico’s revenue collections, which were revised last year, are on target. The island collected $8.69 billion of general-fund revenue from July through May, $15 million above revised budgeted estimates, according to Puerto Rico’s Treasury Department.
This report was supplemented by material from the Associated Press.