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Wednesday, July 29, 2015

Floundering Puerto Rico Unable to Pay

Floundering Puerto Rico Unable to Pay

The U.S. territory doesn't have the funds to meet an Aug. 1 debt payment deadline.

A man plays his guitar while begging for money on June 29 in front of a shuttered business in Old San Juan, Puerto Rico. The commonwealth is weighed down by a massive amount of outstanding debt.
By Andrew Soergel July 27, 2015 | 6:19 p.m. EDT
Just as Greece and its international creditors have finally set the table for the cash-strapped country's third bailout deal in five years, a Puerto Rican repayment deadline has reared its ugly head, ensuring that a potential default on a massive amount of debt remains in the headlines for at least another few weeks.
The Puerto Rico Public Finance Corporation – a subsidiary of the U.S. territory's Government Development Bank – doesn't have enough cash to give its bondholders tens of millions of dollars by Saturday's deadline, Victor Suarez, the Puerto Rican governor's chief of staff, told reporters in San Juan on Monday, according to CNBC and Reuters. Suarez said Puerto Rico will do "everything that is possible" for the development bank's debt to be repaid.
But Puerto Rico's Infrastructure Financing Authority also will reportedly abandon its goal of raising nearly $3 billion to refinance a loan the development bank made to the island's Highways and Transportation Authority.
"We are trying to achieve a smaller transaction with reasonable terms of some $400 to $500 million," Suarez said, according to Reuters.
Puerto Rico is staring down more than $70 billion in outstanding debt, several times what Detroit's was when the city filed for bankruptcy back in 2013. But unlike Detroit and Stockton, California – two debt-ridden cities that successfully filed for Chapter 9 bankruptcy protections – Puerto Rico is a U.S. territory. As such, it's not afforded the same legal benefits extended to other American jurisdictions.
And despite a recent push to treat Puerto Rico as a state in ongoing debt proceedings, which would effectively allow the commonwealth to open Chapter 9 filings to its subsidiaries and municipalities, Congress has yet to sign off on any such reclassification.
"They're facing all of these debt payments. And the thing is you don't normally wake up every morning and think about what's going on in Puerto Rico. It's such a small place," says Mauro Guillén, a professor and director of the Lauder Institute at the University of Pennsylvania's Wharton School of Business. "So this initially comes as a surprise that this burden is so big, but it has been growing in the last few years."
Puerto Rico's municipal bonds are afforded what's called triple tax exemption, essentially making them immune to income taxes. Their popularity attracted investors from all over the U.S. as the island territory accrued massive amounts of debt.
But the 2006 expiration of a separate tax credit that helped bring factories – and jobs – from the mainland struck a huge blow to Puerto Rico's economy. Manufacturing plants shuttered their doors and employment opportunities dried up. People began to leave the island in search of new jobs, and those that remained were left with a smaller pool of options.
"After growing continuously for almost two centuries, Puerto Rico's population declined for the first time in 2006, and has since shrunk from its peak to about 3.5 million in 2015," said a recent report commissioned by the Puerto Rican government and conducted by three former International Monetary Fund economists. "Workers are disinclined to take up jobs, because the welfare system provides generous benefits that often exceed what minimum wage employment yields."
As a result, Puerto Rico's economy has ground to a halt and its labor force participation rate dipped below 40 percent in May, compared with 48.1 percent in July 2006, according to the Pew Research Center.
Sen. Richard Blumenthal, D-Conn., and Sen. Chuck Schumer, D-N.Y., earlier this month introduced a Senate bill that would allow Puerto Rico's public corporations to file for Chapter 9 bankruptcy, though its passage is far from guaranteed. Puerto Rico's government is also attempting to negotiate a "haircut" that would essentially forgive some of its outstanding debts.
But a report issued over the weekend and commissioned by a group of debt-holding firms suggested Puerto Rico "has a deficit problem, not a debt problem" and could potentially generate a budgetary surplus by 2017.
The report suggests Puerto Rico wouldn't need any kind of major debt restructuring, and instead could rely on fiscal and economic reforms to generate a surplus. The document notes that Puerto Rico has room to cut governmental and education expenses and that "improved tax compliance" could help bolster gross national product and provide "increased fiscal flexibility." It estimates Puerto Rico could pull together an additional $1.1 billion if it could boost its sales tax collection rates up to the U.S. average.
The report's findings stand in contrast to last month's report commissioned by the Puerto Rican government, which suggested a combination of bondholder concessions, policy updates and general economic restructuring. That report called for a "comprehensive program" that shares "the costs and benefits of reform across government, workers, businesses and creditors."
"Negotiations with creditors will doubtlessly be challenging: There is no U.S. precedent for anything of this scale and scope," the report said. "But difficult or not, the projections are clear that the issue can no longer be avoided."

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