Tuesday, June 30, 2015

Puerto Rico governor calls for bankruptcy; adviser says island 'insolvent'

This event is not as much talked about in the financial press as the Greece situation, Puerto Rico's debt is 300 billion less than the Greek debt, but its a mirror of the Greek situation in what it means to the US Municipal Bond market. -AK

Puerto Rico governor calls for bankruptcy; adviser says island 'insolvent'

Puerto Rico's governor on Monday called for the commonwealth to be allowed to restructure its debts under U.S. bankruptcy code, while a newly appointed adviser to the U.S. territory said it is "insolvent" and will soon run out of cash.

Governor Alejandro Garcia Padilla, in a televised address, said sacrifice must be shared by bondholders, as he called for Washington to allow a bankruptcy debt restructuring.

The Caribbean island is struggling to relieve a $73 billion debt burden. It came to a crunch point on Monday - ironically at the same time as did debt-laden Greece - after a dire report on its stability by former International Monetary Fund economists was released ahead of key deadlines on Wednesday to repay debt.

Steven Rhodes, the retired U.S. bankruptcy judge who oversaw Detroit's historic bankruptcy and has now been retained by Puerto Rico to help solve its problems, gave a blunt assessment on Monday.

Puerto Rico "urgently needs our help," Rhodes said. "It can no longer pay its debts, it will soon run out of cash to operate, its residents and businesses will suffer," he added.

Puerto Rico's bonds skidded on Monday as investors sought greater compensation amid the heightened risk.

Puerto Rico is not eligible for debt restructuring under the U.S. bankruptcy code because it is not a municipality.

Rhodes said the island's future hinges on gaining eligibility for debt restructuring, while stressing that bankruptcy would not be a "bailout."

Garcia Padilla called for Washington to grant the U.S. territory the ability to file for bankruptcy in a televised address, as he said that his goal is to come up with a negotiated moratorium with bondholders to postpone debt payments for a number of years.

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"Puerto Rico needs a complete restructuring and development plan, comprehensive and inclusive, that takes care of the immense problem we face today, not on a short but on a long-term and definitive basis," Garcia Padilla said. "The alternative would be ... halting of payments with all the negative consequences that this implies."

Garcia Padilla said the next step must be to get creditors to agree to more favorable payment terms. He is establishing a working group to examine restructuring public debt, with a deadline to have a plan by Aug. 30. The legislature is required to approve the plan.

Garcia Padilla also said that citizens may face cuts in services as the government reduces spending.

"The situation is dire, and I mean really dire," said former IMF economist Anne Krueger, co-author of the report commissioned by the U.S. territory, which recommended debt restructuring, tax hikes and spending cuts. "The needed measures may face political resistance but failure to address the issues would affect even more the people of Puerto Rico."

Citizens of Puerto Rico could face tough measures such as fewer teachers, higher property taxes and suspension of the minimum wage, if Puerto Rico follows the report's recommendations of debt restructuring and austerity measures. Garcia Padilla said he would not support cuts to the minimum wage.

The report, made available late Sunday, said Puerto Rico's fiscal problems are much worse than assumed and that the island needs to restructure its debts because tax rises and spending cuts alone would not be enough of a fix.

Bondholders, even those who own government debt that is generally regarded as sacrosanct, would have to take a hit under the report's recommendations. The report recommended a debt restructure via a voluntary exchange of existing bonds for new ones with a longer or lower debt service profile.

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