The government of Puerto Rico confirmed Monday that it failed to make a $58 million debt payment in a significant escalation of the debt crisis facing the U.S. island territory.
Back in the spring, Puerto Rico instituted a mandatory two-day furlough per month for its public workforce, which officials said would save $50 million dollars.
The government had warned on Friday that it would not make the payment and argued that it should not be considered a default under a technical definition of the term, an argument rejected by Moody’s Investor Service and others.
“They’re making a strategic default, and they’re prioritizing payments, and so they’re going to do the ones that are less important first, and that’s going to… strongly influence bondholders to negotiate”, said Eiler, who personally holds PFC bonds.
Puerto Rico was inadequate to pay off its debt due to Public Finance Corp (PFC) bonds.
Standard & Poor’s took a similar stance, saying in a statement: “We believe the default signals severe liquidity distress, whereby Puerto Rico must now choose among which financial obligations it can honor”.
Representative Ramos has introduced legislation to change the Puerto Rican constitution which now requires the commonwealth to pay all debts first before any other obligations. By tapping the municipal bond market in that way, the bank removed the liabilities from its own balance sheet. Investors bought up these bonds – which have been particularly popular because of their so-called triple tax exemption – with the expectation that Puerto Rico would be able to repay its debts, with interest, when the time came.
Marxuach said the government seemed to be hoping to attract attention in Congress, where a bill that would give certain public enterprises on the island access to bankruptcy court has been languishing.
Puerto Rico has defaulted on debt by paying only a fraction of what was due August 1, showing the depth of the island’s economic and cashflow problems and potentially opening the door to broader defaults and litigation from bondholders.
Earlier on Tuesday, White House Press Secretary Josh Earnest told reporters that US President Barack Obama’s administration does not plan on bailing out Puerto Rico.
But as investors have prepared for the default, they learned that the bonds’ prospectus does not describe this safety feature the same way the bonds’ indenture does, leaving confusion about what it takes to activate the letter of credit, or whether the guarantee is meaningful at all.
Acosta said that $628,000 was available for a partial payment because that much money was left over from appropriations in previous years. Hear more on why Attorney Mudd is skeptical of Puerto Rico’s officials here. However, Puerto Rico cannot file for bankruptcy as the island is not covered under the U.S. Bankruptcy Code. These tax breaks propelled Puerto Rico to becoming one of the top prescription drug manufacturers in the world, and around 13 of the top 20 prescription drugs are actually made in Puerto Rico, according to Michael Fletcher, from The Washington Post.
“Since Puerto Rico is not a sovereign country, and we’re not a state of the union, we’re really in limbo”, Marxuach said.
There are self-help remedies that can be implemented to ease some of the pressure Puerto Rico faces.