Puerto Rico officially in default; bail-out unlikely, no option for bankruptcy

Puerto Rico facing historic default on its $72 billion debt

Puerto Rico

Debt-ravaged Puerto Rico is in default after forking over only a fraction due in a bond payment, raising the prospect of further pain for the recession-plagued commonwealth and potential impacts on U.S. investors.

Puerto Rico’s Government Development Bank paid only $628,000 of the $58 million due creditors, the agency said. It said the decision “reflects the serious concerns about the Commonwealth’s liquidity” and the need to ensure “essential services (residents) deserve are maintained.”

​Given the tiny payout, “Moody’s views this event as a default,” said Emily Raimes, vice president at the U.S. credit giant.

Puerto Rico’s outstanding debt of $72 billion is far bigger than Detroit’s $20 billion bankruptcy two years ago but a fraction of Greece’s $350 billion in obligations. But unlike Detroit, there’s no law allowing Puerto Rico to declare bankruptcy. And Treasury Secretary Jack Lew has said the federal government won’t bail out the island, as institutions such as the International Monetary Fund rescued Greece.

“There’s no big daddy to rescue Puerto Rico,” says Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics.

Proposals in Congress that would let the Commonwealth file for bankruptcy have stalled.

Goldman Sachs said last month it expects Puerto Rico’s crisis to have minimal spillover effects on the U.S. economy and other municipal bonds because it’s widely viewed as an anomaly.

But Lew told Congress a significant portion of Puerto Rico’s debt is held by individual retail investors or municipal bond funds. Earlier this year, Charles Schwab said about 30% of municipal bond mutual funds have holdings in the island. Hufbauer, however, said Puerto Rican bonds represent a small fraction of total municipal bonds.

Although Puerto Rico could raise taxes to narrow its budget deficit, that likely would accelerate the mass exodus of residents from the island, Hufbauer says. The commonwealth has been in and out of recession since corporate tax breaks for manufacturers locating there were phased out in 2006.

Contributing: Nathan Bomey

By Paul Davidson and Ed Brackett

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Source: USA Today

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