Puerto Rico Avoids Default

AP

Puerto Rico avoids default on debt payment - Puerto Rico made good on a $355 million debt payment due Tuesday, but the government signaled that making its next payment – $1 billion due New Year's Day – would pose a far greater challenge.

The U.S. commonwealth is staggering beneath $72 billion debt amid a historic economic crunch. The island's government already partially defaulted on a $58 million payment due in August from a subsidiary of the Government Development Bank. Puerto Rico's next challenge comes Jan. 1 when various Puerto Rican entities must pay $1 billion to creditors.

During a Senate hearing examining the island's financial collapse Tuesday, Sen. Richard Blumenthal, D-Conn., said it required "financial gymnastics" for Puerto Rico to clear Tuesday's much smaller deadline.

The Obama administration and some members of Congress have proposed changing the law to allow Puerto Rico to use bankruptcy protections to resolve its debt with its creditors.

Over the past decade, Puerto Rico's government has laid off 30,000 employees, closed nearly 200 schools, raised taxes and reformed pension funds, Gov. Alejandro García Padilla told the Senate panel. During that time, more than 300,000 islanders moved to the U.S. mainland, reducing the island's tax revenue even more. Those factors combined to create an economic situation that the government can't resolve on its own since the government cannot take advantage of the Chapter 9 bankruptcy protections U.S. municipalities can use.

"Let us be clear: we have no cash left," Padilla said. "This is a distress call."

Most of the $354.8 million payment due Tuesday fell under a category of debt that must be paid according to the island's constitution. Investors around the world, including a series of mutual funds held by many Americans, worried that a default would lead to an economic collapse.

The island's Government Development Bank said it paid "all principal and interest payments" on Tuesday's payment. But the bank also announced that Padilla signed an executive order giving the government more flexibility to decide which future debt payments to honor and which to allow to go into default.

GDB President Melba Acosta Febo said Tuesday's payment at least shows how hard the government is working to do right by its investors.

"We hope today serves as a clear indication that (we) intend to honor our obligations to the extent possible without interrupting essential public services," she said in a statement. "However, the Commonwealth's overall fiscal position remains tenuous."