Puerto Rico warns it can't make debt payments, austerity on the way

The governor of Puerto Rico has warned that it can't pay its $72 billion public debt, and says it is hoping to defer debt payments and negotiate with creditors, spokesman Jesus Manuel Ortiz said Sunday night.

The news, delivered on the eve of a private meeting with legislators on Monday, delivering another jolt to the recession-gripped U.S. territory as well as a world financial system already worrying over Greece's collapsing finances.

Gov. Alejandro Garcia Padilla is expected to air a pre-recorded televised address after meeting with legislators, who are still debating a $9.8 billion budget that calls for $674 million in cuts and sets aside $1.5 billion to help pay off the debt. The budget has to be approved by Tuesday.

Ortiz confirmed comments by Garcia Padilla that appeared in a report in The New York Times published late Sunday, less than a day before Garcia Padilla planned to meet with legislators.

Heading for default

"There is no other option. I would love to have an easier option. This is not politics, this is math," Garcia Padilla is quoted as saying in the Times.

Puerto Rico's bonds were popular with U.S. mutual funds because they were tax-free, but hedge funds and distressed-debt buyers began stepping in to buy up debt as the island's economy worsened and its credit rating dropped.

Garcia Padilla's comments will likely not have much impact on Wall Street, said economist Jose Villamil, a former U.N. consultant and CEO of an economic and planning consulting firm.

"The markets are clear that Puerto Rico is heading to a direction of a restructuring or default," said the economist, adding that a voluntary restructuring by bondholders might be the best option.

"The last four administrations have kicked the can down the road," said Villamil. "At this point, there is no more can to kick. So we're going to take some very strict measures and some very profound measures. It's going to hurt, but there's no way out."

Why tell the NY Times?

Some legislators were taken aback by Garcia Padilla's comments, including Rep. Jenniffer Gonzalez, spokeswoman for the main opposition party.

"I think it's irresponsible," Gonzalez said. "He met privately with The New York Times last week, but he hasn't met with the leaders of this island."

Puerto Rico's constitution dictates that the debt has to be paid before any other financial obligation is met. If Garcia Padilla seeks to not pay the debt at all, it will require a referendum and a vote on a constitutional amendment, she said in a phone interview.

Puerto Rico's situation has drawn comparisons to Greece, where the government decreed this weekend that banks would be shuttered for six business days and restrictions imposed on cash withdrawals. The country's five-year financial crisis has sparked questions about its continued membership in the 19-nation shared euro currency and the European Union.

Can a government file for bankruptcy

Puerto Rico's governor recently confirmed that he had considered having his government seek permission from the U.S. Congress to declare bankruptcy amid a nearly decade-long economic slump. His administration is currently pushing for the right for Puerto Rico's public agencies to file for bankruptcy under Chapter 9. Neither the agencies nor the island's government can file for bankruptcy under current U.S. rules.

Puerto Rico's public agencies owe a large portion of the debt, with the power company alone owing some $9 billion. The company is facing a restructuring as the government continues to negotiate with creditors as the deadline for a roughly $400 million payment nears.

Garcia Padilla has taken several measures to help generate more government revenue, including signing legislation raising the sales tax to 11.5 per cent and creating a 4 per cent tax on professional services. The sales tax increase goes into effect Wednesday and the new services tax on Oct. 1, to be followed by a transition to a value-added tax by April 1.