Governor Alejandro García Padilla of Puerto Rico said Sunday that the island territory will not be making a payment of more than $420 million of its debts. It is not the first such payment Puerto Rico has defaulted on, but it is the largest. The territory will likely default on additional payments owed on July 1st unless Congress intervenes.
Despite the fact its economy has been slouching for the last 10 years, investors have been drawn to Puerto Rico since its status as a territory means that its bonds are exempt from income tax applicable to residents of the 50 states. The debt moratorium ordered by the governor has ruffled creditors and may cause a string of lawsuits.
“This was a painful decision,” the governor said on Sunday.
“We would have preferred to have had a legal framework to restructure our debts in an orderly manner, but faced with the inability to meet the demands of our creditors and the needs of our people, I had to make a choice. I decided that essential services for the 3.5 million American citizens in Puerto Rico came first.”
Governor Padilla said paying the debt would have entailed cutting service for the island’s residents, including keeping schools and public hospitals open.
“We will continue working to try to reach a consensual solution with our creditors,” he said. “That is one of our commitments. But what we will never do is put the lives and safety of our people in danger.”
Congress is still uncertain of how to deal with the economic situation in Puerto Rico. Given that the island is a territory of the USA rather than a state, it is not currently eligible for restructuring through municipal bankruptcy. Negations are being held in the House of Representatives to create a new law that would give Puerto Rico legal powers to abrogate debt, but the progress is slow.
“Puerto Rico needs Speaker Paul Ryan to exercise his leadership and honor his word,” Padilla said. “We can’t wait longer. We need this restructuring mechanism now.”