Puerto Rico, without access to financial resources after falling into default – The Economist

The default hit Puerto Ricans, especially credit unions and savings.

The island is a US commonwealth 3.5 million. File photo: Reuters

The default of Puerto Rico to not honor a debt of a public corporation closes the doors to finance market amid a dramatic lack of liquidity.

The government of Alejandro García Padilla just $ 628,000 disbursed 58 million due on August 1 of the Public Financing Corporation (PFC, for its acronym in English), citing lack liquidity in the Commonwealth of 3.5 million people plunged into a prolonged recession.

The default hit Puerto Ricans creditors, particularly credit unions and savings. But some of these bonds were sold in the US market, which disrupts the ability of future financing, analysts said.

“the door of government funding and corporate market closes” US , said Jose Joaquin Villamil, an analyst at Technical Studies in San Juan.

“The creditors are not just local, that’s a mistake,” he said before the decision of the island, suffocated by debt 72,000 million dollars that the governor himself García Padilla calls “priceless”.

However, credit houses Wall Street had already downgraded Puerto Rico bonds to junk level, making it difficult to access the bond market.

The governor García Padilla negotiates with creditors and a team prepared a restructuring plan to escape the “vicious cycle of contraction, migration, austerity and taxes.” That plan must be submitted later this month.

Victor Suarez, Secretary of the Interior, said that the administration defaulted on the debt as it prepares to pay more than 100 million to other creditors who bought government bonds, known as GOS.

The crisis hits hard at the population, with unemployment at 12.4%, more than double the 5.3% in the continental United States, and a massive migration which reduces the base tax.

The situation was aggravated by years. The finances of the island were severely beaten in 2006 at the end of a system of tax exemption for companies and that caused a decline in economic activity. Successive governments issued debt to cover the growing deficit.

Without liquidity

The default also weakened the credit unions of Puerto Rico, the main holders of bonds, although does not threaten their survival “because it is such an important part of its investment portfolio,” estimated Villamil.

According to the economist, the current lack of liquidity is partly due to the decision last year of the Legislative Assembly of Puerto Rico to increase the tax on a liter of gasoline to 4 cents, but devote the resources thus collected to pay a debt of 2,200 million from a state agency to the Government Development Bank (GDB . central), now with insufficient resources

“The liquidity problem is real; exists for many reasons, “he said Villamil.

The legislature approved a 11.5% increase in the consumption tax, which took effect on July 1, with the intention of raising tax revenue.

Melba Acosta, president of the BGF, reiterated that the decision not to honor the debt is due to a real lack of liquidity and the need for the government to maintain essential services to the population.

White House ruled out an eventual bailout, while supporting the possibility that Puerto Rico may benefit from US bankruptcy law to restructure its debt, as have cities like Detroit; however, the decision on that protection lies with the Congress.

The fall in default was criticized by opposition parties, who lamented the impact on the image of the Caribbean island, it will take years to rehabilitate his name.