Puerto Rico says debt restructuring needed to avert crisis

Puerto Rico will face a humanitarian crisis unless the U.S. Congress extends bankruptcy protection to the debtburdened territory, Gov. Alejandro Garcia Padilla warned lawmakers on Tuesday.

The governor’s testimony before the Senate Judiciary Committee in Washington coincided with an announcement in San Juan that Puerto Rico met a Dec. 1 deadline to pay $354 million on constitutionally guaranteed debt.

“The imminence of a default when presented with the alternative between paying creditors and providing essential government services looms large,” Garcia Padilla told senators. “That is why starting today the commonwealth of Puerto Rico will have to claw back revenues pledged to certain bonds issued in order to maintain public services.”

“We have taken this difficult step in the trust that Congress will act soon,” he continued. “But do not be misled. We have no resources left. Puerto Rico cannot keep this up longer.”

Puerto Rico, with a public debt of $72 billion, has been mired in recession for nearly a decade, prompting some 300,000 island residents to seek better prospects on the U.S. mainland.

San Juan has done all it can to avoid default, the governor said, pointing to a reduction of more than 20 percent in government spending, sharp cuts to public employee pensions and the pending imposition of an 11.5 percent value added tax.

Puerto Rico is not seeking a federal bailout, but the chance to restructure its debt through negotiations with creditors under Chapter 9 of U.S. bankruptcy law, Garcia Padilla said.

The Senate Judiciary Committee also heard from Puerto Rico’s nonvoting representative in Congress, Pedro Pierluisi, who likewise urged lawmakers to extend Chapter 9 protections to the island.

Pierluisi, a political rival of Garcia Padilla, criticized the current administration in San Juan for lack of discipline and transparency, while complaining that Washington’s policies toward Puerto Rico are “inequitable and incoherent.”

Speaking at the same hearing, former New York Lt. Gov. Richard Ravitch, now an adviser to the Puerto Rican government, called on Congress to authorize a comprehensive debt restructuring.

Stephen Spencer, an executive with investment bank Houlihan Lokey, which is advising holders of bonds issued by Puerto Rico state electric company AEE, argued that Puerto Rico should not be allowed to use Chapter 9.