Puerto Rico’s government said today that it would not be making a $58 million bond payment due over the weekend and warned that the general fund run out of liquidity by November if no action is taken. The Gubernatorial Chief of Staff Victor Suarez said at a news conference that the island’s Public Finance Corporation could not meet the payment due Saturday. He added that the government still hopes to reach an agreement with the creditors on renegotiating its debt as the government doesn’t have any money to pay. The statement is being seen as a huge negative by traders and analysts.
It was Governor Alejandro Garcia Padilla who had warned several weeks ago that the government and the state agencies cannot repay the $72 billion in public debt that hangs over the US territory which is struggling with a nearly decade long economic slump caused mainly on the back of the financial crisis which had pushed the nation into a recession. A recession which many believe the country was unable to pull itself back from. Officials in Puerto Rico believe that the failure to make the payment will not constitute a default because it involves moral obligation bonds which mean there are no legal requirements to repay them, but analysts on the street reject the argument.
Analysts on the street believe that the failure to repay obligations is a default, no matter how the government tries to disguise it. Analysts and economists believe that bondholders can file a lawsuit as soon as next week as a result of the non-payment , which many say would be the first default in the history of the US territory. Many traders and hedge fund managers on the street who have exposure to bonds issued by Puerto Rico said that they weren’t surprised.
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