Puerto Rico’s Failure to Pay: Potential Crisis in US?
According to the Washington Post, Puerto Rico’s governor, Ajejandro Garcia Padilla, recently announced that that the island is unable to pay back more than $70 billion in debt. A default could precipitate an unprecedented financial crisis with the potential to disrupt the once-staid municipal bond markets and lead to higher borrowing costs for governments across the U.S. See, http://www.washingtonpost.com
Moreover, the island’s debts, estimated to be as much as $73 billion, is four times that of Detroit which became the largest U.S. city to file for bankruptcy in 2012. Mr. Padilla intends to pursue concessions from creditors, ranging from US mutual funds to large hedge funds that bought Puerto Rican debt at high interest rates, in an effort to extend loan payments and reduce borrowing costs that are hindering Puerto Rico’s struggling economy.
Historically, municipal bonds have long been considered safe investments — an assumption that has shifted in recent years as a small but steady string of U.S. municipalities, including Detroit, as well as Stockton and Vallejo in California, sought bankruptcy protection. In principal, Chapter 9 of the U.S. bankruptcy code offers bond holders at least some protection from municipal defaults by providing an orderly process by which they can recoup at least some of their money. But Puerto Rico, a U.S. Territory, like U.S. states, cannot legally file for bankruptcy so are denied the protections afforded municipalities in chapter 9. If Mr. Padilla fails to reach an agreement with bond holders, an unwieldy, uncharted and long-lasting process to sort out the island’s financial obligations could result. The uncertainty could unnerve financial markets already jittery over the turmoil of a renewed debt crisis in Greece.
On Monday, the governor and Puerto Rico’s government development bank released a report (http://www.gdbpr.com/documents/PuertoRicoAWayForward.pdf) analyzing the island’s finances. According to Garcia Padilla in a statement issued Monday, the report, by former World Bank chief economist and former deputy director of the International Monetary Fund Anne Krueger and economists Ranjit Teja and Andrew Wolfe, “…for the first time acknowledges the true extent of the problem. . . . We must make difficult decisions to meet the challenges we now know are ahead, and I intend to do everything in my power to lead us through this time.”
Puerto Rico’s state-run corporations that provide crucial services like water and electricity may soon receive a Congressional life line. A bill before Congress would give them the same bankruptcy protections enjoyed by U.S. cities, allowing the island’s residents to avoid a possible spike in already skyrocketing utility rates and the possible service interruptions that might result from corporations falling into receivership. More importantly, future growth could be improved by making financing available for investment in more efficient power plants and other infrastructure. See, Can Bankruptcy Save Puerto Rico?
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