Puerto Rico Governor Warns of Another Default

Puerto Rico's governor, Alejandro García Padilla, in February. PHOTO: REUTERS

Puerto Rico’s governor, Alejandro García Padilla, in February. PHOTO: REUTERS

Por NICK TIMIRAOS – Puerto Rico Gov. Alejandro García Padilla said the territory won’t make a roughly $800 million payment on the island’s general-obligation debt due July 1.

“As of today, the answer is no, I don’t think we will be able to come up with an idea to have that money,” Mr. García Padilla said Friday in an interview for C-SPAN’s “Newsmakers” conducted by a pair of reporters, including one from The Wall Street Journal.

The island’s Government Development Bank on Monday missed most of a $422 million payment, the largest so far by the island. The default had been largely expected because the GDB was viewed as insolvent.

But a default on the general-obligation bonds issued by the commonwealth likely would accelerate the island’s debt crisis because those bonds have constitutional priority.

“The same happened last Monday. The same will happen the first of July. We just don’t have the money,” the governor said.

Creditors say such threats to default on the most senior obligations of the government will make it even harder for the government to one day issue new bonds. A default also could escalate a legal battle between the island and its creditors and between different classes of creditors that hold bonds with competing security pledges.

U.S. House Republicans are completing legislation to create a federal oversight board for Puerto Rico, granting the power to sign off on local budgets and to authorize a court-supervised debt restructuring. The bill wouldn’t commit U.S. taxpayer funds. Some creditors have opposed it because they say it would invert payment priorities.

Congress is considering legislation because the commonwealth’s public institutions don’t have access to federal bankruptcy courts, unlike some municipalities in U.S. states. Because Puerto Rico isn’t a country, it can’t turn to the International Monetary Fund for assistance.

U.S. Treasury Secretary Jacob Lew will travel to the island Monday, the Treasury Department said Friday. House Speaker Paul Ryan (R., Wis.) has forcefully rallied Republicans to back the legislation, the product of unusually bipartisan discussions with the Treasury. Both officials have warned that without congressional action, calls for actual taxpayer assistance will rise.

Mr. García Padilla said that while the current legislation wouldn’t cost taxpayers a dime, he warned that Puerto Rico would need a bailout totaling billions of dollars if the crisis wasn’t addressed immediately.

Puerto Rico has been mired in a recession for a decade and borrowed heavily to balance budgets. Despite the shaky economy, investors snapped up its debt for years thanks to generous tax incentives. The borrowing spree plugged annual deficits but did little to create economic opportunity on the island. Residents, who are U.S. citizens, have steadily left for jobs on the mainland, eroding Puerto Rico’s tax base.

The debt crisis has taken on new urgency due to the breakout of the mosquito-borne Zika virus. Federal health officials have said Puerto Rico could see a significant number of cases, straining the island’s public-health infrastructure.

Separately, Mr. García Padilla responded to concerns that Major League Baseball players raised about traveling to Puerto Rico because of the Zika virus for games that had been scheduled in San Juan later this month. “It’s offensive. It’s just ignorance,” the governor said.

The Pittsburgh Pirates and the Miami Marlins had been set to play in San Juan in honor of Roberto Clemente, the late Puerto Rican baseball star who the league will commemorate May 31.

Later Friday, the league said it decided to move the games to Miami because too many players on both clubs had objected to traveling to Puerto Rico. Mr. García Padilla said the risk of Zika is no higher in San Juan than in Miami.

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