Puerto Rico Weighing Plan to Stop Paying Debt to Preserve Cash

  • Chief-of-staff says island needs money for essential services
  • The commonwealth and its agencies owe $70 billion of debt

Puerto Rico may suspend principal and interest payments on its bonds in less than three months as the island struggles to cover health and safety programs, according to an administration official.

The potential halt on debt-service payments comes as the commonwealth’s Government Development Bank faces a $422 million debt payment May 1. Puerto Rico and its agencies owe investors $2 billion on July 1, including $805 million for general-obligations, according to data compiled by Bloomberg.

The island is debating whether to make the debt payments because it doesn’t have the funds to continue providing essential services, Grace Santana, chief of staff to Governor Alejandro Garcia Padilla, told reporters Wednesday in San Juan. The island warned in its debt-restructuring proposal released earlier this month that it may need to stop making such payments if it can’t reach a deal with investors to restructure its debt by May 1.

“A moratorium on payment of debt is under consideration,” Santana said.

Investors may sue the commonwealth if it defaults on its direct debt, something it has avoided by raiding tax money earmarked for other bonds. Three bond insurers are already suing Puerto Rico for redirecting funds that are dedicated to some agency bonds so that it can pay general-obligation bondholders.

Puerto Rico and its agencies owe $70 billion after years of borrowing to fill budget gaps. The U.S. Congress is debating whether to allow the commonwealth to restructure its debt and also implement a federal control board that would oversee the island’s spending and borrowing plans. Its economy has shrunk in the past decade and residents are leaving to find work on the U.S. mainland.

The commonwealth is looking to reduce its obligations by 46 percent by persuading investors to exchange their bonds for new securities.

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