MIAMI - With two days left in Puerto Rico's fiscal year, the cash-strapped commonwealth is struggling to pass a Budget that would allow it to make payments on a US$72 billion (S$97 billion) debt load that the Caribbean island's governor said is unsustainable.
Governor Alejandro Garcia Padilla told the New York Times in an interview last week that investors should be prepared to sacrifice if they want the island's economy to grow.
"The debt is not payable... There is no other option."
The governor's remarks land in a jittery global debt market, as investors weigh the possibility of a Greek default and exit from the euro zone.
"He ran out of options," said Mr Robert Donahue, managing director at Municipal Market Analytics, a Massachusetts-based research firm. "Further borrowing would have only compounded unsustainable debt and worsened economic deterioration."
Puerto Rico, a nation of 3.5 million people, is grappling with a jobless rate double the US national average and a debt load bigger than every United States state except California and New York.
Some Puerto Rican bonds are trading near record lows.
According to a copy of a report by former International Monetary Fund (IMF) economists posted on websites of the nation's media, Puerto Rico needs to restructure its debts to bridge financing gaps in coming years, in what could be a precedent-setting move.
The report gave a damning review of how Puerto Rico has arrived at its current problems and said it needed both structural reform and debt restructuring to fix them - even suggesting the restructuring of general obligation debt, which investors usually regard as sacrosanct.
"Puerto Rico faces hard times," said the report commissioned by the Government Development Bank (GDB). "Structural problems, economic shocks and weak public finances have yielded a decade of stagnation, outmigration and debt... A crisis looms."
The US territory's House of Representatives and Senate last week passed differing Budget bills for the fiscal year starting on Wednesday, with negotiations between the two chambers continuing. Under the proposals, about 15 per cent of the US$9.8 billion Budget would go to debt service.
Both plans cut spending by more than US$600 million.
Puerto Rico's cash crunch is intensifying. The GDB had US$778 million of net liquidity as of May 31, down from US$2 billion in October last year.
Officials last week were considering offering to exchange GDB bonds due in the next three years for new debt with longer maturities, according to a person with direct knowledge of the discussions.
The island's main electricity provider is also hitting a wall. The utility, known as Prepa, has a July 1 bond payment that it may not make, and is in negotiations with creditors over restructuring its US$9 billion of debt.
Creditors say the power provider has the money for the payment.
Tax-exempt general obligations maturing in July 2035 traded last Friday at an average of about 77.3 US cents on the dollar, close to the lowest since they were issued at 93 US cents, according to data compiled by Bloomberg. The debt yields about 10.8 per cent.
About half of US municipal mutual funds hold debt from Puerto Rico, which is tax-exempt nationwide.
The IMF report said the country has the scope to raise revenue by US$4 billion and save US$2.5 billion annually by 2025, yet a large financing gap remains, implying the need for debt relief, and 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.
BLOOMBERG, REUTERS
