Puerto Rico Governor Says Shutdown Won’t Prevent July 1 Default

  • Garcia Padilla says commonwealth doesn’t have cash to pay
  • Bonds gain amid expectations Congress will approve bill

Eight days before about $2 billion in bond payments come due, Puerto Rico Governor Alejandro Garcia Padilla reiterated that the commonwealth will default on its general obligations even if he halted services on the island.

“If I shut down the government, I will not have enough money to pay,” Garcia Padilla said Thursday during a panel discussion at the Center for American Progress Action Fund in Washington.

Garcia Padilla is in the nation’s capital lobbying for Congressional approval of a bill that would set up a framework for the commonwealth to restructure its $70 billion in debt. The Senate is supposed to take up the measure next week. The House passed the bill, which also has the support of the Obama administration.

Puerto Rico owes $805 million on its general-obligations, which the island’s constitution stipulates must be paid before other expenses, on July 1. Including its agencies, the island faces a $2 billion principal and interest payment. Even limiting government operations won’t free up cash to pay creditors, the governor said.

The island’s securities have been rallying even with the threat of a default. General obligations with a 5.5 percent coupon and maturing July 2039 traded Thursday at an average price of 65.3 cents on the dollar, up from 62.7 cents the day before, according to data compiled by Bloomberg.

A default on the general-obligation debt would be the first by a state-level borrower since Arkansas missed payments in 1933. The island’s economy has shrunk in the past decade and residents are leaving for the U.S. mainland to find work. Puerto Rico said Tuesday that negotiations with some of its creditors to reduce the island’s debt load ceased after non-disclosure agreements lapsed.

Some general-obligation bondholders sued Puerto Rico on the same day over its debt moratorium law, which allows Garcia Padilla to suspend principal and interest payments on island debt through January. The governor warned that he won’t be able to pay essential services if a judge rules in favor of the plaintiffs.

“It’s just a reality. We do not have the money,” Garcia Padilla said. “That’s why we’ve been saying that we will default on July 1.”

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