Puerto Rico Governor Dismisses Default as Way Out of Crisis

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Puerto Rico Governor Alejandro Garcia Padilla said defaulting on the U.S. commonwealth’s bonds would be a mistake as the island struggles with one of the worst fiscal crises in its history.

In a speech Thursday to lawmakers who hours earlier rejected his proposed tax overhaul, Garcia Padilla said he will craft new steps to steady the junk-rated island’s finances, without disclosing specifics. He rejected the idea of not repaying its bonds, saying it would harm island residents who’ve bought them.

“Sometimes we talk about the possibility of not paying our debts -- this is folly,” Garcia Padilla, 43, said in his annual State of the Commonwealth speech to the legislature. “Don’t believe that we have only contracted debt with wealthy investors and foreigners. Our debt is also with Puerto Ricans who have put their savings in our bonds.”

The price of Puerto Rico’s newest bonds dropped to a record low Friday, as the tax proposal’s defeat in the House of Representatives dealt a setback to Garcia Padilla’s plan to raise revenue. The vote jeopardized the prospects for a $2.9 billion bond sale that authorities say is needed to prevent a government shutdown within three months.

Shutdown Possible

A shutdown is “one of the things we’re trying to avoid, but we must be prepared because of the vote,” Garcia Padilla said Friday in an interview on NotiUno radio. “It could be that government revenue will not keep pace with government spending, spending that the government needs to operate.”

Puerto Rico and its agencies owe $73 billion, including $13 billion of general-obligation debt. While Garcia Padilla stressed the island must repay its obligations, he said it’s working with creditors to restructure debt owed by its agencies.

Negotiations with creditors to the Electric Power Authority are under way, the governor said. Such a move may require bondholders to take a loss on $8.6 billion of utility debt. His administration has also backed legislation in Congress that would allow some agencies to file for bankruptcy protection, just as cities such as Detroit can.

“Puerto Rico is facing one of the greatest fiscal and economic crisis in its history,” Garcia Padilla said.

Commonwealth’s Lender

The Development Bank, which handles the island’s debt sales, has said passage of the tax plan is essential to attracting investors to the planned bond deal. Proceeds of the debt would bolster the finances of the bank, which lends to the island and its localities.

The bank’s net liquidity declined to $1.1 billion as of March 31 from $2 billion in October. Puerto Rico’s economy has struggled to grow since 2006, leaving the government reeling from debt sold to balance budgets. Because its bonds are tax-exempt nationwide, they are held by U.S. mutual funds and individual investors.

Puerto Rico bonds maturing in 2035 dropped to an average price of 78.5 cents on the dollar Friday from 78.6 cents Thursday, pushing the yield up to 10.6 percent. It was the lowest average price for the securities since they were issued in March 2014.

Debt sold by the commonwealth and its agencies has lost 2.4 percent this year, the worst annual start since at least 2007, according to S&P Dow Jones Indices. The broader municipal market has gained about 0.6 percent.

Garcia Padilla said he would present a five-year budget plan “in the coming weeks.” Lawmakers must approve a budget by June 30 for the next fiscal year. The governor said he will also create two commissions to address financial and government reforms.

“Our current government is a suit made to fit the Puerto Rico of the ’50s and ’60s,” Garcia Padilla said.

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