Puerto Rico Governor Defies Board to Avoid ‘Death Spiral’

  • Governor says more austerity will worsen island’s collapse
  • Board needs plan before restarting talks with creditors

Puerto Rico Governor Alejandro Garcia Padilla is refusing a U.S. oversight board’s request to redraw his plan for pulling the island from a debt crisis, marking a challenge to the newly formed federal panel that threatens to further delay negotiations with bondholders.

Members of the Financial Oversight and Management Board for Puerto Rico, set up under a U.S. rescue law, rejected the governor’s fiscal plan submitted in October, saying that his projections rely too heavily on federal funding. At a meeting in Puerto Rico on Friday, the seven-member panel agreed to ask the governor for a revised plan, which they aim to certify by the end of January to make way for negotiations with creditors.

Garcia Padilla, who didn’t run for re-election in November and will be succeeded by Ricardo Rossello in early January, on Monday said the plan "will not be revised to add austerity," according to an e-mailed statement in Spanish. "It’s not right, and it’s not necessary. What the oversight board has suggested will send our economy into a ‘death spiral.’"

Federal overseers warned on Friday that additional spending cuts are needed to close Puerto Rico’s chronic budget deficits, which stem from a legacy of government borrowing while the island was mired in recession. Board members said they need to have a certified long-term fiscal plan in place before restarting talks with the island’s creditors.

Puerto Rico has been defaulting on a growing share of its $70 billion debt as Garcia Padilla’s administration conserves cash to avoid shutting off services to the island’s 3.5 million residents, nearly half of whom live in poverty. Rossello, the governor’s successor who is a member of the opposing political party, has said he would pay creditors interest if they agree to a delay in principal payments. He wants to reach a deal with bondholders before February, when a moratorium sheltering the island from creditor lawsuits is due to expire.

"It’s a shame that the Governor is unwilling to work on the fiscal plan he presented, defaulting on his duty and showing little interest for the future of Puerto Rico’s fiscal health," Governor-elect Rossello said in e-mailed statement. "We aim to change that approach, working diligently to change the structure of government, and implement public policy that will facilitate his process."

The island’s 8 percent coupon general obligations maturing in 2035 traded at an average of 69.9 cents on the dollar Monday, down from 70.8 cents on Friday, data compiled by Bloomberg show. The securities had gained in value over the past few weeks as investors grew more optimistic that the incoming governor will reach an agreement with bondholders.

Jose Luis Cedeno, a spokesman for the federal board, said members could not be immediately reached for comment.

"Padilla’s administration may wind up delaying this process to some extent," said Ted Hampton, a Moody’s Investors Service analyst in New York. "But we think ultimately the oversight board does have the ability to impose fiscal policy on the commonwealth."

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