Puerto Rico in crisis as govt admits it cannot pay debts

In a televised address, Governor Alejandro Garcia Padilla called for a moratorium on repayments of the $73 billion (65.5 billion euros) owed by the territory to its creditors and said he would form a team to restructure public debts.

"The goal is going to be a moratorium that is negotiated with bondholders to delay debt payments for a number of years, so money is available to be invested here in Puerto Rico, to create jobs," he said.

On the same day, the government released a study by ex-officials of the International Monetary Fund and the World Bank that said Puerto Rico's debt load is unsustainable and needs to be rescheduled.

The country's "true fiscal deficit is much larger than assumed", it said.

"Even a major fiscal effort leaves residual financing gaps in coming years, which can be bridged by debt restructuring", which, it proposed, would mean creditors exchanging existing bonds for new ones with a longer and lower debt service profile.

Economic ‘death spiral’

The governor’s announcement was the latest chapter in Puerto Rico’s long-running saga of financial woe that could have knock-on repercussions for global financial markets and has drawn comparisons with the crisis in Greece.

Last week, Garcia Padilla gave an interview with the New York Times in which he said he was trying to pull the island out of an economic “death spiral” and that concessions on debt payment was the only way to do this.

“The debt is not payable,” he said. “There is no other option. I would love to have an easier option. This is not politics, this is math.”

The admission rattled stock markets, quickly knocking 10 percent off prices of Puerto Rican bonds.

The territory, a self-governing US commonwealth of 3.5 million people whose residents have US citizenship, has been in recession since 2009.

The island was hit hard by the global financial crisis, but as Monday’s report highlighted, its problems go back further and are significantly more complicated than that.

“Structural problems, economic shocks and weak public finances have yielded a decade of stagnation, outmigration and debt,” it said.

The report highlighted the phasing out of US tax law that gave tax breaks to mainland manufacturers that set up shop on the island.

Other problems to have hit the territory’s economy include a collapse of house prices, a relatively high minimum wage that has put employers off hiring new staff and a sharp rise in global oil prices that have hit the island – which depends on imported oil for nearly all its power generation – particularly hard.

As the economy shrinks, so have tax revenues and the country’s borrowing has spiralled to now make up 100 percent of GDP.

Comparisons with Greece

Sergio Marxuach, policy director at the Puerto Rico-based consulting group Center for the New Economy, drew parallels between the island’s economic problems and those of Greece.

“If we look at how the government operates, the lack of transparency of public finances, the bad quality of statistics, the massive tax evasion, the government corruption ... it’s the same in Greece like in Puerto Rico,” he said. “When it comes to the magnitude of the crisis, obviously Greece is at a much more complicated and deeper level ... and I hope we don’t end up there.”

But in some ways, Puerto Rico faces even more significant challenges in solving its crippling debt problem and economic decline than does the crisis-hit European nation.

The island’s government has proposed a new budget that will cut spending and allocate around 16 percent of revenues to servicing its debt, far higher than that paid by Greece.

Meanwhile, as a self-governing territory of the United States and not a sovereign nation, it cannot appeal to international bodies like the International Monetary Fund (IMF) for help, while the White House has ruled out a bailout package for the island.

It can also not follow in the steps of the likes of Detroit and file for bankruptcy protection as, not being a municipality, it is ineligible under US law.

While Puerto Rico has already made some budget cuts in an effort to bring its debt under control, Monday’s report recommended further structural reforms like cutting civil servants' salaries and the costs of providing public services like electricity and transport.

Garcia Padilla, though, promised he would not inflict the kind of painful austerity measures Greece and other debt-laden countries in Europe have been forced to undergo.

"We are not going to be forced to make a choice between paying the police, or paying teachers and nurses, and paying the debt,” he said.

(FRANCE 24 with AFP, AP)