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Puerto Rico defaults on bond payment, pays fraction of US$58m

People walk past a closed store in San Juan, Puerto Rico, on July 31, 2015.

[NEW YORK] Puerto Rico has defaulted on its debt by paying only a fraction of what was due on bonds due Aug 1, showing the depth of the island's economic and cashflow problems and potentially opening the door to litigation.

The commonwealth paid only US$628,000 of a US$58 million payment due on its Public Finance Corp bonds, the head of its Government Development Bank said in a statement on Monday. "Due to the lack of appropriated funds for this fiscal year, the entirety of the PFC payment was not made today," GDB head Melba Acosta said.

Puerto Rico Governor Alejandro Garcia Padilla shocked investors in June when he said the island's debt, totaling US$72 billion, was unpayable and required restructuring. The non-payment marks the first default by the commonwealth and is the most notable since Detroit defaulted on US$1.45 billion of insured pension bonds before filing for bankruptcy in 2013.

"(They are) telling investors they are serious about this debt adjustment," said Peter Hayes, head of asset manager BlackRock's Municipal Bonds Group. "It may be a precursor to how they make payments going forward if they can't reach amicable settlements with creditors groups."

A default could open the door to a fight with investors. Daniel Hanson, analyst at Height Securities, said in a research note last week that market participants would probably file suit in San Juan as soon as Tuesday.

While Puerto Rico has argued that missing a payment would not constitute default because its legislature is not legally bound to appropriate the funds for payment, credit agencies and investors saw it differently. "Moody's views this event as a default," said Moody's analyst Emily Raimes in a statement. "This is a first in what we believe will be broad defaults on commonwealth debt." PFC bonds have weaker protections than many other Puerto Rico bonds such as general obligation debt.

Mr Acosta said the decision reflected "serious concerns about the Commonwealth's liquidity in combination with the balance of obligations to our creditors and the equally important obligations to the people of Puerto Rico." Mr Acosta said that PFC made a partial payment of interest in respect from funds remaining from prior legislative appropriations. These funds of US$628,000 were applied to the Aug 1 payment.

"A government's primary responsibility is to provide services to citizens," said Mr Hayes.

"When you finally make the determination not to pay, you know you're effectively cutting yourself off from the capital markets, but from their standpoint they see it better of two evils."