Puerto Rico avoids default, but warns finances in crisis

Puerto Rico said Tuesday it had made a $354 million bond payment after threatening for days to default as the US territory seeks legislation to permit it to enter bankruptcy restructuring.
But the Caribbean island, burdened by some $72 billion in debt, made clear that it might miss further payments on debts in the next month without some relief from creditors and legislative support.

The announcement from the Government Development Bank for Puerto Rico that the December 1 payment had been made came just as the island's governor, Alejandro Garcia Padilla, was telling a congressional hearing that it was facing a crisis with potentially "catastrophic" consequences.

He warned that, even with Tuesday's payment, the government is now being forced to choose between essential services for citizens and debt repayment.

"The imminence of a default, when presented with the alternative between paying our creditors and providing essential government services, looms large," he told the Senate Judiciary Committee.

Garcia Padilla had warned over the past week that the island's government might not be able to make the debt payment due Tuesday.

Over the past year, a government agency had missed a relatively small payment on its bonds. But so far the government has made good on its own direct borrowings.

In a statement, the Government Development Bank warned the next step could be a major default by Puerto Rico public corporations, whose debt is guaranteed by the territory's government.

It said that Garcia Padilla had signed a new executive order permitting revenues heretofore committed to debt service by state enterprises to be diverted to pay directly issued government debt.

Speaking to Congress, Garcia Padilla said the move would divert funds meant to repay $7 billion in bonds.

"In simple terms, we have begun to default on our debt in an effort to attempt to repay bonds issued with the full faith and credit of the Commonwealth and secure sufficient resources to protect the life, health, safety and welfare of the people of Puerto Rico," he said.

Garcia Padilla told the Senate panel that Puerto Rico's situation is hampered by creditors that have not agreed to reschedule its debt, and by US laws that prohibit the territory from entering bankruptcy protection.

He said that emergency budget measures have forced the island further into recession and exacerbated the exodus of hundreds of thousands of Puerto Ricans to the mainland United States.

"If Congress does not provide Puerto Rico the authority to restructure all its liabilities, a humanitarian crisis will envelop the 3.5 million American citizens on the island. We are simply requesting rule of law," he said.

With hundreds of millions of dollars in payments due at the end of December, credit rating agency Standard & Poor's said later Tuesday that Puerto Rico's chances of avoiding default "remain bleak".

It said a default by the Government Development Bank "is virtually certain" in the coming months.