The government of Puerto Rico has declared a moratorium after Governor Alejandro Garcia Padilla declared that the island’s Government Development Bank (GDB) will be unable to make its $422 million payment due to creditors on May 2, setting the island to default. The moratorium was signed on April 30 in lieu of the default, which is the biggest one in the commonwealth’s history amid the decade-long economic crisis.
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“Faced with the inability to meet the demands of our creditors and the needs of our people, I had to make a choice,” said the governor in his speech. “I decided that essential services for the 3.5 million American citizens in Puerto Rico came first.”
Puerto Rico had been facing a $70 billion debt while suffering from a 45% poverty rate and high unemployment rate amid shrinking population due to mass emigration to the US mainland. Over 80,000 people had left Puerto Rico for the mainland in 2015 alone.
Puerto Rico had paid $355 million on December 1, 2015 to keep a default from happening. However, Puerto Rico’s fiscal position remained dire and the payment only ended up delaying what is now an inevitable default. Governor Garcia Padilla and the government of Puerto Rico have not published annual fiscal statements since the fiscal year of 2013.
Austerity measures—which included laying off teachers and closing schools—were suggested by hedge fund managers to help pay back the debt during this time, which the Padilla government outright rejected. Puerto Rico had already shut down over 150 schools in the last few years.
This missed payment by the GDB may pave the way to even bigger problems for Puerto Rico courtesy of larger defaults. While officials had been negotiating with creditors to defer payments, credit-rating companies saw the default as pretty much inevitable given the island’s overall economic situation. Puerto Rico now owes around $470 million to bond investors.
“We do not want a bailout. We haven’t asked for a bailout. We haven’t been offered a bailout,” the governor added, addressing continued inaction from the US Congress despite the severity of the crisis. Puerto Rico’s debt crisis draws some comparisons with Greece’s own debt crisis and subsequent bailout and civil turmoil.
In the meantime, the US Congress is in recess until the week of May 9. US House Speaker Paul Ryan had called for a plan of action on March 31, but the draft legislation from the House Natural Resources Committee, which seeks to put Puerto Rico’s finances under federal oversight for restructuring through a process similar to a Chapter 11 bankruptcy, was met with opposition from both Democrat and Republican wings.
“We can’t wait longer. We need this restructuring mechanism now,” said Garcia Padilla about the legislation. “We do not want and we haven’t been offered a bailout. A restructuring process will cost nothing to American taxpayers. We simply want the legal tools needed to address our insolvency crisis and ensure the sustainability of Puerto Rico.”
“If Congress fails to authorize a mechanism to restructure our debt, the 3.5 million American citizens who live in Puerto Rico will continue to suffer,” he added.
HBO’s Last Week Tonight with John Oliver came out with a coverage about Puerto Rico’s debt crisis on April 24. The show had previously discussed Puerto Rico as a part of its coverage on US territories, addressing many of the problems that led to what Puerto Rico now faces.
Puerto Rico’s economy had started to shrink back in 2006, leading to many problems including the hike of sales tax from 7% to 11.5%, which is far higher than everywhere else in the US. With the default happening, it’s certainly not the end for Puerto Rico’s troubles as the default puts an even bigger damper on the commonwealth’s efforts to pay off its debt.
[Image via Joe Raedle/Getty Images]