Miles away, Puerto
Rico’s governor, saying he needs to pull the island out of a “death spiral,”
has concluded that the commonwealth cannot pay its roughly $72 billion in
debts, an admission that will probably have wide-reaching financial
repercussions.The governor, Alejandro García Padilla, and senior members of his
staff said in an interview last week that they would probably seek significant
concessions from as many as all of the island’s creditors, which could include
deferring some debt payments for as long as five years or extending the
timetable for repayment.
“The debt is not
payable,” Mr.García Padilla said. “There is no other option. I would love to
have an easier option. This is not politics, this is math.”It is a startling
admission from the governor of an island of 3.6 million people, which has piled
on more municipal bond debt per capita than any American state.A broad
restructuring by Puerto Rico sets the stage for an unprecedented test of the
United States municipal bond market, which cities and states rely on to pay for
their most basic needs, like road construction and public hospitals.That market
has already been shaken by municipal bankruptcies inDetroit; Stockton, Calif.;
and elsewhere, which undercut assumptions that local governments in the United
States would always pay back their debt.
Puerto Rico’s bonds
have a face value roughly eight times that of Detroit’s bonds. Its call for
debt relief on such a vast scale could raise borrowing costs for other local
governments as investors become more wary of lending.Perhaps more important,
much of Puerto Rico’s debt is widely held by individual investors on the United
States mainland, in mutual funds or other investment accounts, and they may not
be aware of it.Puerto Rico, as a commonwealth, does not have the option of bankruptcy.
A default on its debts would most likely leave the island, its creditors and
its residents in a legal and financial limbo that, like the debt crisis in
Greece, could take years to sort out.
Still, Mr.García
Padilla said that his government could not continue to borrow money to address
budget deficits while asking its residents, already struggling with high rates
of poverty and crime, to shoulder most of the burden through tax increases and
pension cuts.With other payment deadlines looming, Mr.García Padilla and his
staff said they would begin looking for possible concessions on all forms of
government debt.In June, Puerto Rico hired Steven W. Rhodes, the retired
federal judge who oversaw Detroit’s bankruptcy case, as an adviser. The
government is also consulting with a group of bankers from Citigroup who
advised Detroit on a $1.5 billion debt exchange with certain creditors.
So, there are Nations, which are
buried deep in debt crisis.
With regards – S.
Sampathkumar
30th June 2015.
