Puerto Rico needs debt restructuring
Puerto Rico needs to restructure its debts and should make reforms including cutting the number of teachers and raising property taxes, a report by former International Monetary Fund economists on the Caribbean island’s financial woes said.
The report, which was obtained by Reuters, gave a damning review of how Puerto Rico has arrived at its current state, which it said requires both structural reform and debt restructuring to fix.
“Puerto Rico faces hard times,” the report said. “Structural problems, economic shocks and weak public finances have yielded a decade of stagnation, outmigration and debt… A crisis looms.”
The report even suggests the restructuring of general obligation debt, which could be a precedent-setting move as investors usually regard as sacrosanct.
Social reforms proposed include suspending the minimum wage and reducing electricity and transport costs. The island must overcome a legacy of weak budget execution and opaque data, the report said.
Puerto Rico Governor Alejandro Garcia Padilla is expected to give a televised address on Monday, according to local media, and officials said they expected to discuss the report with him during the day.
The island is struggling with a $73 billion debt load and faltering economy while its Government Development Bank is running low on cash. It is facing crunch time this week with several bond payments due while its struggling power utility PREPA is in talks to avoid a possible default.
The report was written by former IMF economists, who were engaged in February by the Government Development Bank to analyze the island’s economic and financial stability and growth prospects.
The document, first posted on Puerto Rico media websites, was verified as authentic by one of the authors.
The governor’s office and a spokesman for the Government Development Bank were not immediately available for comment. The report is expected to be officially released on Monday.
It said Puerto Rico would need to seek relief from principal and interest payments falling due from 2016 to 2023.
A debt restructure could be achieved via a voluntary exchange of existing bonds for new ones with a longer or lower debt service profile, the report said.
The island has the scope to raise revenue by $4 billion and save $2.5 billion annually by 2025, it said.
The report said any restructuring of general obligation, or central government debt, would set a precedent as “no U.S. state has restructured (such debt) in living memory” and said any attempt would face legal challenge. However, it said there are limits to how much more expenditures can be cut or taxes raised.
According to the report, Puerto Rice has 10 percent more teachers than a decade ago while student numbers have dropped 40 percent.
The New York Times on Sunday cited Governor Padilla saying that the island’s debts were not payable and that creditors would probably have to take significant concessions such as five-year payment deferrals.
This coming week “is the tipping point,” said Adam Weigold, senior portfolio manager at Eaton Vance, on Friday.
Puerto Rico’s debt problems could lead to a reduction in government services, investors said. However, a source familiar with the situation said on Friday the island is not contemplating a partial or full shutdown of government services.
“Next week is probably a good buying opportunity,” said Daniel Hanson, analyst at Height Securities, on Friday. “We expect a lot of downside in all the bonds.”
Puerto Rico’s benchmark general obligation bonds issued in March 2014 slid on Friday to close at a record low of 77 cents on the dollar to yield 10.84 percent.