Puerto Rico defaults on $779M bond debt

 In this July 29, file 2015 photo, the Puerto Rican flag flies in front of Puerto Rico's Capitol as in San Juan, Puerto Rico.
In this July 29, file 2015 photo, the Puerto Rican flag flies in front of Puerto Rico's Capitol as in San Juan, Puerto Rico.

SAN JUAN, Puerto Rico -- Puerto Rico defaulted on its debts Friday as it prepared for the implementation of a federal oversight board that will have control over the island's strained finances and provide room for the U.S. territory to ease its debt burden.

The government paid roughly half of $2 billion in due debt, but said it left unpaid for lack of money $779 million owed on general obligation bonds that are given top priority by the island's constitution. Gov. Alejandro Garcia Padilla signed an executive order Thursday declaring a moratorium on a portion of that debt.

"Even if I had shut down the government, we wouldn't have had enough money to make the payment," Garcia said at a news conference Friday.

A bill to help the island restructure its debt, signed Thursday by President Barack Obama, means that "Puerto Rico will now govern itself like an adult country, responsibly, spending only what it can afford," the governor said. "Today, the island starts belonging to us again and not to Wall Street."

Puerto Rico has only $200 million in cash in the operating account from which it was supposed to pay the general obligation bond debt, according to the Government Development Bank, which oversees the island's debt transactions and is operating under a state of emergency that permits withdrawals only for essential public services.

The bank warned Friday that the government will implement what it called "extraordinary liquidity measures" in the next six months, including delaying payments to vendors and special contributions to the struggling retirement systems, so that it can continue to provide essential services. Despite those measures, revenue in the operating account is expected to drop below about $95 million later this year, an amount that the bank referred to as "dangerously low."

Grace Santana, the governor's chief of staff, noted that the federal rescue package does not immediately change the island's dire financial situation.

"The government's liquidity is still fragile," she said.

While the market had anticipated Friday's default, it affects the credibility of a territory grappling with $70 billion in public debt, economist Jose Villamil warned.

"This has enormous consequences," he said. "The default is very significant, and it likely means that Puerto Rico will not be able to re-enter the market for many, many years."

The federal rescue package will temporarily protect the U.S. territory from lawsuits by creditors seeking to recover millions of dollars invested in Puerto Rico bonds, which had been attractive because of their triple tax-exempt status. Many of those investors were particularly attracted by Puerto Rico's general obligation bonds because of their constitutional guarantee of repayment.

Garcia defended the debt moratorium as well as the state of emergency he implemented Thursday at four government agencies, including the island's largest public university and a retirement system that has been shorted $40 billion.

"We're doing what's right for Puerto Rico," he said. "These measures are necessary for the island's recovery."

Garcia is expected to soon sign a $9 billion balanced budget based in part on revenue projections that for the first time in the island's history were validated by an independent agency. Previous projections had long fallen short of reality.

Garcia spoke hours after Obama signed a bipartisan bill that in part creates a federal control board for Puerto Rico that will supervise some debt restructuring and negotiate with creditors. It also allows Puerto Rico to temporarily lower the federal minimum wage for some younger workers.

The bill will give the island's government some breathing room and allow it to maintain essential services, Villamil said. However, the control board might eventually implement austerity measures that could lead to government layoffs and affect services, he said.

Exempt from Thursday's implementation of the debt moratorium is Puerto Rico's heavily indebted power company, which announced that it reached a separate deal with creditors to avoid defaulting on a $415 million payment.

The Electric Power Authority said creditors agreed to buy $264 million worth of new bonds as part of the agreement. Those creditors hold 70 percent of the agency's $9 billion debt. Officials said part of the money will be used for capital projects.

11.7% Unemployment

Evidence of the island's financial woes is apparent at Bluewater Defense, a maker of U.S. military uniforms. As a shift neared its end on a recent day, workers hurried to keep pace with one another, as the company tracks daily output, sets targets and awards bonuses for good performance.

With official unemployment running 11.7 percent in Puerto Rico, the 523 people employed by Bluewater Defense covet their jobs. They travel as much as three hours round-trip for pay that, including benefits, averages about $10 an hour.

Eric Spackey, chief executive of Bluewater, said he too feels pressure to keep the doors open, and as military uniform orders decline he has hustled to find new customers.

"These people need these jobs," Spackey said. "If we took them away, they'd be on government assistance."

Bluewater is trying to keep afloat as the island founders in its debt. Despite the passage of legislation in Congress to help Puerto Rico manage its debt and unfunded pensions, the situation on the ground remains fraught: Agencies are running out of cash; taxes are rising; the state-run electric utility is delivering dismal service at high prices; and many young, capable people are leaving for better prospects on the mainland.

Nearly 1,600 miles away in Washington, Congress has been working on a lifeline. The seven-person financial oversight board established Thursday will have the power to overrule the local legislature's spending plans and negotiate with bond and hedge funds, pensions and politicians to restructure the territory's debts.

But the board, whose members have not been named or vetted, will need three to six months to get up and running.

Meanwhile, the territory's agriculture department has suspended subsidies to farmers; the treasury has withheld tax refunds; and many suppliers, unpaid and unwilling to extend commercial credit, now demand to be paid on delivery by a government that owes them $2 billion.

Building contractor Ariel Ferdman said that one government agency owes his company more than $1 million and that he received two checks -- for a total of $164,030 -- from the Government Development Bank that bounced.

"We're businesses trying to get the economy moving, and we're not able to do it," Ferdman said. "The government doesn't pay debts to us, let alone bondholders. The government owes billions to contractors. That's killing us in the economy. We're choked."

Discontent is also stirring among Puerto Ricans of more modest means, nearly 400,000 of whom have fled to the mainland over the past decade in search of better jobs and health care.

Irma Delgado Rios, who keeps the production floor clean at Bluewater Defense, has a daughter who left a job at Bluewater nine years ago to work in a restaurant in Syracuse, N.Y.

Hiram Rivera-Baez, 50, who sews the final trouser seams on uniforms, said his son-in-law left for Texas five years ago to start an air-conditioning business. Three years ago, Rivera-Baez's aunt, uncle and brother left to join his son-in-law in Texas, and all three found jobs.

Now his family wants him to go, too, but he said Puerto Rico is home.

"If I have a good job, I'll stick with it," Rivera-Baez said.

The flight to the mainland has hurt hospitals most severely. For example, Puerto Rico's only stroke center with round-the-clock specialists closed after three of its four neurologists moved to the mainland, and the last, overworked, resigned. Many fear that widespread Zika virus infections -- Bluewater Defense had its first case last month -- will add to the health care system's costs.

"We're losing doctors, and they tend to be the better doctors," said Jim O'Drobinak, chief executive of MCS, the largest private health care company in Puerto Rico. The reason is the federal government has cut reimbursement rates, and MCS has had to cut costs -- "and that means wages," he said.

Some Puerto Ricans are determined to stay.

Carlos Lopez-Lay runs 10 car dealerships. He has started a "social movement" that he calls "I'm Not Quitting."

"I don't want to say just survive," he said. "We can flourish."

Information for this article was contributed by Danica Coto and Mary Clare Jalonick of The Associated Press and by Steven Mufson of The Washington Post.

A Section on 07/02/2016

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