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Puerto Rico says it is being crushed by debt, low growth
[SAN JUAN] Puerto Rico's governor geared on Monday to address the US territory's deepening financial crisis after admitting it cannot pay back its US$72 billion in debt and warning that without economic growth it will fall into a "death spiral." Alejandro Garcia Padilla's admission in an interview with the New York Times rattled stock markets and quickly knocked 10 per cent off prices of Puerto Rican bonds.
"The debt is not payable," Garcia Padilla told the paper. "There is no other option. I would love to have an easier option. This is not politics, this is math." On Monday the government released a study by ex-officials of the International Monetary Fund and the World Bank that says Puerto Rico's debt load is unsustainable and needs to be rescheduled.
The country's "true fiscal deficit is much larger than assumed," it said.
"Even a major fiscal effort leaves residual financing gaps in coming years, which can be bridged by debt restructuring," which, it proposed, would mean creditors exchanging existing bonds for new ones with a longer and lower debt service profile.
"The debt cannot be made sustainable without growth, nor can growth occur in the face of structural obstacles and doubts about debt sustainability." The White House, which has had a special task force working on the island's finances for months, said it was not contemplating any bailout of Puerto Rico.
"But we do remain committed to working with Puerto Rico and their leaders as they address the serious challenges," said spokesman Josh Earnest.
Garcia Padilla was planning to address the territory late Monday.
He and senior staff members told the Times the island would likely seek concessions from its creditors, possibly deferring some debt payments for up to five years.
ECONOMY STILL SHRINKING
The economy of Puerto Rico has posted negative growth for eight years. Ratings agencies like Moody's classify Puerto Rican debt as junk bonds.
The financial problems of the Caribbean island, which has a population of only 3.6 million, have shaken the large market for US municipal bonds, especially after Detroit declared bankruptcy in 2013.
Puerto Rico has been able to sell huge amounts of debt due to its tax-free status in the US municipal bonds market, making its debt more valuable than other city bonds.
But unlike Detroit, which declared itself broke to force creditors to write off some debt, as a commonwealth, the island cannot file for bankruptcy.
That means any default on its debt could take years to resolve.
The Puerto Rican announcement came a day before Greece, likewise struggling with economic contraction and unsustainable debt, is expected to default on its official bailout loans from the International Monetary Fund.
The report on the Puerto Rican economy, released by the Government Development Bank, the main issuer of the island's debt, said the economy is caught in a vicious cycle: weak public finances fuel investor wariness and low growth, and that in turn increases the budget deficit and debt.
It recommended structural reforms like cutting civil servants' salaries and the costs of providing public services like electricity and transport. The local electric company alone is saddled with debt to the tune of nine billion dollars.
But it also strongly pushed the idea of a debt restructuring, which will not be easily achieved with creditors.