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Puerto Rico's 'death spiral' has officially begun
(Reuters)
Puerto Rico's Public Finance Corp. has officially failed to make a payment due August 1.
The president of the island's development bank, Melba Acosta, has said it paid $628,000 of the $58 million due.
And according to CNBC, credit rating agency Moody's considers that a default.
This means a bunch of painful events are about to be set in motion.
Investors in the PFC will now prepare to negotiate a restructuring plan — they will likely push for the government to take on austerity measures like cutting costs and raising taxes.
The discussions will be watched closely by investors holding some of the rest of Puerto Rico's $72 billion worth of debt, who may end up in the same process as well.
"Now is where the nuances begin to show," said David Fernandez, a public finance lawyer with Buchanan, Ingersoll, and Rooney. "Note that the GDB's President Melba Acosta was quick to state that the $169 million debt service payment due on its bonds would be made.
"I believe the table is being set to isolate the various types of indebtedness and set the stage for restructuring of those various debts within the constructs of those debt documents. Up until now the conversation has always been this is the 'Commonwealth's debt' but now we are seeing that in fact there are layers to that analysis and each issuing entities debts need to be considered in isolation."
Fernandez believes that, considered that way, the island's debt will be easier to restructure and manage.
Here's hoping.
In June, Puerto Rico Gov. Alejandro García Padilla said that the territory's debt burden had simply gotten too large for it to bear. After years of anemic growth and brain drain, Puerto Rico has been left with a 12% unemployment rate and stagnant wages, leading Padilla to come clean and ask investors for mercy.
"My administration is doing everything not to default," Padilla said. "But we have to make the economy grow," he added. "If not, we will be in a death spiral."
(REUTERS/Alvin Baez)
Puerto Rico Gov. Alejandro García Padilla.
Part of the problem is that, according to Puerto Rico's constitution, it cannot declare bankruptcy. To deal with that, it can either lobby Congress to amend the US tax code (not likely to happen) or negotiate with creditors to their satisfaction, which some analysts believe will require Congress to form a special committee to supervise Puerto Rico's budget.
Forming that committee is distasteful to Gov. Padilla, whose term ends in 2016. A new government may be more amenable to the idea, though, according to Eurasia Group analyst Corey Boles.
"While this would be politically difficult on the island, it's possible that a new administration in Puerto Rico in 2017 could ask Washington to create such an entity, arguing for example, that it had inherited a fiscal mess and needed help to push through messy reforms," Boles wrote in a note last week.
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