Puerto Rico misses debt payment with string of defaults to come

Puerto Rico is in technical default on a $58-million debt bill due Monday, reflecting an economy in trouble amid an extended drought in the U.S. territory.

The island paid just $628,000 toward a $58-million payment due to creditors of its Public Finance Corp., whose debt is mostly owned by ordinary Puerto Ricans through credit unions.

"This was a decision that reflects the serious concerns about the Commonwealth's liquidity in combination with the balance of obligations to our creditors and the equally important obligations to the people of Puerto Rico," Puerto Rico's Government Development Bank president Melba Acosta Febo said in a statement.

Moody's Investor Services has said it expects further broad defaults on the island's debt.

A financial filing by the government reveals it has  stopped making contributions of $92 million a month into a fund that is used to make payments on an additional $13 billion in bond debt.  The next  payment from the fund is due on Sept. 1.

Puerto Rico's governor, Alejandro Garcia Padilla, has put together a team to come up with a plan to restructure Puerto Rico's debt by the end of the summer.

"The economy has been in decline for the past 10 years since the U.S. government withdrew a lot of preferences for the manufacturing sector," said  Desmond Lachman, a senior fellow at the American Enterprise Institute in Washington.

Joblessness and cutbacks

Puerto Rico's unemployment rate is above 12 per cent and public services have suffered as the government cuts back.

We're going to see a wave of defaults and what makes this more troubling is that Puerto Rico can't avail itself of the bankruptcy provisions of the U.S.- Desmond Lachman, American Enterprise Institute

"At the same time, they haven't been careful with their public finances," Lachman said, pointing out that money has been cheap and the national debt is now equal to its annual GDP.

"We're going to see a wave of defaults and what makes this more troubling is that Puerto Rico can't avail itself of the bankruptcy provisions of the U.S. like other municipalities in the U.S. might be able to do, so this could be a free-for-all between debtors and creditors," he said in an interview with The Exchange with Amanda Lang.

Lachman predicts there will be pressure on the U.S. Congress to act, either by allowing Chapter 9 bankruptcy for Puerto Rico, the same rules that helped Detroit, or by taking control of the island's finances.

If it doesn't act, hedge funds will step in and take legal action to enforce their claims, he said.

People leave for U.S.

Some 144,000 people left the U.S. territory between 2010 and 2013, and about a third of all people born in Puerto Rico now live in the U.S. mainland. Schools and businesses have closed amid the exodus. The population of 3.5 million is expected to drop to 3 million by 2050.

The government has tried to boost revenue by hiking the sales tax to 11.5 per cent, higher than any U.S. state, and by closing government offices. Its debt-burdened power utility already charges rates that on average are twice those of the mainland, and is under pressure from bondholders to raise them higher.

That's resulted in businesses and citizens pulling back on power use. Meanwhile, a drought has led to rationing of water, hurting the tourist trade.

The higher taxes have discouraged consumer spending and hurt small businesses.

Carmen Davila, a 65-year-old retired truck driver and window dresser, recently withdrew her money from the bank amid fears the government would shut down and seize it.

"Things are happening in Puerto Rico that we've never seen before," Davila said. "Puerto Rico has always had its ups and downs, but you could handle it. This now is serious."