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Puerto Rico Can’t Pay $72b Public Debt

Puerto Rico Can’t Pay $72b Public DebtPuerto Rico Can’t Pay $72b Public Debt

The Puerto Rico governor warned that it can’t pay its $72 billion public debt on the eve of a private Monday meeting with legislators, delivering another jolt to the recession-gripped US island as well as a world financial system already worrying over Greece’s collapsing finances.

Gov. Alejandro Garcia Padilla is hoping to defer debt payments while negotiating with creditors, spokesman Jesus Manuel Ortiz said Sunday night, Fortune reported.

Garcia 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.

Puerto Rico’s bonds were popular with US 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’s comments will likely not have much impact on Wall Street, said economist Jose Villamil, a former UN consultant and CEO of an economic and planning consulting firm.

Puerto Rico’s constitution dictates that the debt has to be paid before any other financial obligation is met. If Garcia 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 governor recently confirmed that he had considered having his government seek permission from the US 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 US 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.

Financialtribune.com