SAN JUAN, Puerto Rico – A spiraling Puerto Rico debt crisis reached a new milestone as the island missed nearly $370 million on a bond payment Monday and officials warned of worse to come if the U.S. Congress doesn’t help it dig out from a mountain of debt.
The default was the largest in a series of missed payments by the struggling U.S. territory since last year and Gov. Alejandro Garcia Padilla warned it was unlikely to be the last.
Puerto Rico has payments totalling nearly $2 billion coming due on July 1, including about $700 million in general obligation bonds that are supposed to be guaranteed under the island’s constitution. In an ominous warning directed at Congress and creditors that include U.S. hedge funds, Garcia said the outlook for the next payment is bleak.
“We don’t anticipate having the money,” he told a news conference in the capital, San Juan.
The remedy, Garcia warned, is either a restructuring arrangement with creditors or legislation from Congress. U.S. lawmakers left for recess last week while a bill that would restore Puerto Rico’s legal authority to restructure as states are able to do and set up a fiscal control board was stalled in committee.
Garcia, who inherited the crisis when he took office in January 2013, blamed lobbying by “vulture” hedge funds and what he called “racist” attitudes toward Puerto Rico.
“Our worst enemy at the moment is politics,” he said.
White House spokesman Josh Earnest said Monday’s default should be another red flag for Republicans in Congress. “This situation requires an urgent response and Republicans in Congress have been dragging their feet for too long,” Earnest said.
The White House has put forward a plan that would allow Puerto Rico’s government to restructure its debt and impose new oversight on finances, among other measures. Earnest said the oversight measures distinguish the proposal from a bailout — a charge Republicans have lodged against the plan. But, Earnest warned, continued delay in Congress “only makes a bailout more likely.”
Following Monday’s default, U.S. Treasury Secretary Jacob Lew released a letter to House Speaker Paul Ryan in which he urged him to work quickly to resolve the “few outstanding issues” on the legislation to help Puerto Rico. “Going forward, Puerto Rico’s $70 billion of debt is unsustainable by any measure. It simply cannot afford to pay its debt,” Lew said.
Garcia has been warning since last year that the island’s overall public debt of more than $70 billion is unpayable. On Sunday, he announced the suspension of a payment on debt issued by the island’s Government Development Bank, a day before a scheduled $422 million was due on the GDB’s $3.8 billion in debt.
Puerto Rico managed to reach a restructuring deal with island credit unions that shaved off about $30 million from the total due Monday, and paid $22 million in interest. But that still left it short nearly $370 million, and in default.
Garcia said he had no choice but to suspend the debt payment to avoid cutting essential public services such as schools and medical care.
The default was expected to trigger investor lawsuits, though Treasury Secretary Juan Zaragoza and Justice Secretary Cesar Miranda told The Associated Press before the news conference that none had been filed so far. It did not cause upheaval in U.S. financial markets, likely because the island’s economic troubles have been known for years.
Puerto Rican citizens have struggled through a decade of recession, cuts to public services, rising taxes and much higher unemployment than on the U.S. mainland, and it now stands at nearly 12 per cent. Many on the island are anxious about the default, but agree there was little choice.
“If they pay the debt, they are going to cut health care and that’s what worries everybody,” said 83-year-old Jose Ugarte as he sat with friends discussing the implications in a plaza in Old San Juan. “This is a debt that isn’t ours. It belongs to (former governors) Luis Fortuno and Pedro Rossello. Let them pay it.”
But 24-year-old Vilmarie Galarza says she isn’t so sure. “To me, it’s bad because you have to pay,” she said as she paused while taking photos in the plaza.
Puerto Rico has been suffering through more than a decade of economic decline since Congress phased out tax cuts that had made the island a centre for pharmaceutical and medical equipment manufacturing. Garcia’s predecessors, with the acquiescence of the island legislature, borrowed heavily to cover over budget deficits.
The total debt of the island of some 3.5 million people is greater than any U.S. state except much more heavily populated California and New York.
During the 2009-2013 term of Garcia’s predecessor, former Gov. Luis Fortuno, some 30,000 public sector workers were laid off in an unsuccessful effort to get the budget under control. Asked if he was considering anything similar, Garcia said that would hurt families and would just ripple across the private sector as it has in the past. He said he would only cut the public payroll if ordered by a court.
“It’s a very complicated situation. We are navigating waters that no one has ever navigated,” he said. “There’s no map.”
Associated Press writers Martin Crutsinger and Kathleen Hennessey in Washington and Ben Fox in Miami contributed to this report.