Puerto
Rico's governor has signed a bill that puts the island's debt
payments on hold until January 2017. Gov. Alejandro Garcia Padilla
says the island's first priority is covering payments for essential
services.
Puerto Rico
acted this week following reports that a key financial institution,
the Government Development Bank, is nearly insolvent. A group of
hedge funds went to court to block public agencies from withdrawing
funds from the bank. Within hours, the Legislature moved to pass the
debt moratorium by approving the measure.
The law
suspends all bond payments, including general obligation bonds, which
are guaranteed by the island's constitution. It also limits activity
at the government bank and allows it to enter into receivership if
necessary. The bank is facing a May 1 deadline, when a $400
million-plus payment is due.
While the
Legislature was meeting, a group of creditors who hold general
obligation bonds were in San Juan to pursue a deal to restructure
some $5 billion of the island's debt. The head of the Government
Development Bank rejected their proposal, saying, "It is exactly
the type of 'Wall Street' solution that led us to the precipice we
are now looking over."
Creditors
say the measure violates prior agreements and the island's
constitution. But the action buys the Garcia administration time and
increases pressure on the U.S. Congress to help the island find a way
to repay its debt. The U.S. House Natural Resources Committee is
working on a bill that would establish a control board to oversee the
island's finances and help it restructure its debt payments. It's
facing opposition from creditor groups who fear it will give the
island too much leverage and allow Puerto Rico to impose repayment
terms that bondholders don't like.
Puerto Rico
has been caught in a recession for most of the past decade. A series
of administrations used bond revenue to cover budget deficits,
building a debt load that's now more than $70 billion. The poor
economy has led Puerto Ricans to flee the island, most for the U.S.
mainland. Last year, according to the Pew Research Center, 84,000
people left for the mainland U.S.
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