Puerto Rico confronts ‘dire’ debt

Island’s governor negotiates as credit rating drops

SAN JUAN, Puerto Rico — International economists released a critical report on Puerto Rico’s economy Monday on the heels of the governor’s warning that the island can’t pay its $72 billion public debt.

The news that Gov. Alejandro Garcia Padilla delivered late Sunday was another jolt to the recession-gripped U.S. island, as well as a world financial system already worrying over Greece’s collapsing finances.

Garcia is scheduled to air a pre-recorded televised address late Monday afternoon as legislators continue to debate a $9.8 billion budget that calls for $674 million in cuts and sets aside $1.5 billion to help pay off the debt. The budget has to be approved by Tuesday.

Anne Krueger, a former World Bank chief economist who worked on the report commissioned by Garcia’s administration, presented the findings to dozens of government officials ahead of Garcia’s address.

“The situation is dire, and I mean really dire,” she said.

Puerto Rico’s governor hopes to defer debt payments while negotiating with creditors, spokesman Jesus Manuel Ortiz said late Sunday, confirming comments by Garcia that appeared in a report in The New York Times published that evening.

“There is no other option. I would love to have an easier option. This is not politics, this is math,” Garcia is quoted as saying in the Times.

Puerto Rico’s bonds were popular with U.S. mutual funds because they are triple-tax exempt, but hedge funds and distressed-debt buyers began stepping in to buy up debt as the island’s economy worsened and its credit rating dropped.

Garcia’s comments will likely not have much impact on Wall Street, said economist Jose Villamil, a former U.N. consultant and CEO of an economic and planning consulting firm.

“The markets are clear that Puerto Rico is heading to a direction of a restructuring or default,” said the economist, adding that a voluntary restructuring by bondholders might be the best option.

“The last four administrations have kicked the can down the road,” said Villamil. “At this point, there is no more can to kick. So we’re going to take some very strict measures and some very profound measures. It’s going to hurt, but there’s no way out.”

Sergio Marxuach, policy director at the Puerto Rico-based consulting group Center for the New Economy, drew parallels between the economic problems in Greece and Puerto Rico.