NYTimes | Puerto
Rico’s governor, saying he needs to pull the island out of a “death
spiral,” has concluded that the commonwealth cannot pay its roughly $72
billion in debts, an admission that will probably have wide-reaching
financial repercussions.
The
governor, Alejandro García Padilla, and senior members of his staff
said in an interview last week that they would probably seek significant
concessions from as many as all of the island’s creditors, which could
include deferring some debt payments for as long as five years or
extending the timetable for repayment.
“The
debt is not payable,” Mr. García Padilla said. “There is no other
option. I would love to have an easier option. This is not politics,
this is math.”
It is a startling admission from the governor of an island of 3.6 million people, which has piled on more municipal bond debt per capita than any American state.
A broad restructuring by Puerto Rico sets the stage for an unprecedented test of the United States municipal bond market, which cities and states rely on to pay for their most basic needs, like road construction and public hospitals.
That market has already been shaken by municipal bankruptcies in Detroit; Stockton, Calif.; and elsewhere, which undercut assumptions that local governments in the United States would always pay back their debt.
Puerto
Rico’s bonds have a face value roughly eight times that of Detroit’s
bonds. Its call for debt relief on such a vast scale could raise
borrowing costs for other local governments as investors become more
wary of lending.
Perhaps
more important, much of Puerto Rico’s debt is widely held by individual
investors on the United States mainland, in mutual funds or other
investment accounts, and they may not be aware of it.
Puerto
Rico, as a commonwealth, does not have the option of bankruptcy. A
default on its debts would most likely leave the island, its creditors
and its residents in a legal and financial limbo that, like the debt
crisis in Greece, could take years to sort out.
