Puerto Rico to Default on Constitutionally Guaranteed Debt

Puerto Rico faced default on its constitutionally guaranteed debt for the first time by failing to make most of some $1 billion in payments due Friday. The Government Development Bank of Puerto Rico said the cash balances have dropped to dangerously low level. Consequently, the government isn’t likely to pay any of the $779 million debt on general obligation bonds which due this Friday.

“Even if the commonwealth were to devote every last penny” in its operating account to Friday’s debt payments, “it would still owe holders of the public debt hundreds of millions of dollars,” the Government Development Bank said.

Bank officials also announced that Puerto Rico has only $200 million in cash in the operating account from which it was supposed to pay the general obligation bond debt, and they warned the government will implement what they called “extraordinary liquidity measures” in the next half year, including delaying payments to vendors and special contributions to the struggling retirement systems, so that it can keep providing necessary services.

President Obama signed legislation on Thursday to address Puerto Rico’s debt crisis. It doesn’t provide any mechanism to avoid such a default. Instead, it gives Puerto Rico a stay against creditor litigation.

This Friday default would force the three major insurers backing Puerto Rico’s debt to pay out as much as hundreds of millions of dollars to bondholders. Ambac Financial Group backs $122 million in Puerto Rico debt due Friday, according the company’s disclosures. National Public Finance Guarantee Corp. backs $173 million in general obligation debt coming due Friday. Assured Guaranty backs $428 million coming due in the third quarter, most of it also due Friday.

“We’ve got to keep on working to figure out how we promote the long-term growth and sustainability that’s so desperately needed down there, but the people of Puerto Rico need to know that they are not forgotten, that they are part of the American family,” President Obama said.

“The bill will provide the island’s government some breathing room and allow it to pay workers and suppliers on time as well as maintain essential services.” economist Jose Villamil said. “However, it’s possible the control board could eventually implement austerity measures that could lead to government layoffs and affect services.”

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