Puerto Rico Defaults on Debt

05 Aug, 2015

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The government of Puerto Rico has confirmed its failure to make its due debt payments during the weekend, making this economic fail a first time in state history. The commonwealth paid only $628,000 against the $58 million debt due on August 3. The creditors were the Public Finance Corporation. This event will hurt the residents of the island - and not Wall Street. Ordinary Puerto Ricans are in debt via their credit unions.

Insufficient funds

The Puerto Rican Government has said that it has insufficient funds to pay in excess of $50 million due on the bonds. Moody's (NYSE: MCO), the noted ratings agency, has classified these turn of events as a default. Alejandro Garcia Padilla, the governor of the island, has termed the dismal economy of Puerto Rico as a “death spiral”. He has assembled a team to formulate a plan to restructure the debt crisis of the state by summer end.

In June, the Governor of Puerto Rico has said that the island will be unable to pay its massive $70 billion debt. The governor said that the finances of the island need restructuring. The principal reason for paying only $628,000 is that the legislature was loath to allocate adequate funds. The government has said on July 31 that even if it cannot fulfill the total payment, the island should not be classified as a default as per the phrase's technical definition. However, this argument was discounted by almost all financial institutions, including Moody's.

Pain without end

Puerto Rico is saddled with a public debt of $72 billion. This makes it the maximum indebted among all the indebted territories in United States. Unemployment in the island is also at a high of 14 percent, twice that of US national average. The last decades have seen negligible or zero growth- pushing the economy to the edge of a financial bottomless cliff.

Puerto Rico has been losing about 30,000 or one percent of its population every year to Florida and to other regions in the United States. Most of those who depart are economically active young people. The administration has rejected a number of recommendations created by a number of economists from the IMF or International Monetary Fund of employers could pay less than $7.25 per hour, the minimum wage of the federal government. There is also much resistance to trimming the fat public sector making up nearly 20 percent of workforce. The island's inhabitants are hit hard by the turn of events.

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