Puerto Rico fails to make $58-million debt payment

The government of Puerto Rico confirmed Monday that it had failed to make a $58-million debt payment, a significant escalation of the fiscal crisis facing the U.S. island territory.

Puerto Rico made a partial payment of $628,000 in interest but could not afford to make the remainder, which was due Saturday, because the Legislature did not appropriate the funds, said Melba Acosta Febo, president of the Government Development Bank.

The government had warned that it would not make the payment and argued that it should not be considered a default under a technical definition of the term, an argument rejected by Moody’s Investors Service and others.

“This event is consistent with our belief that Puerto Rico does not have the resources to make all of its forthcoming debt payments,” said Emily Raimes, a vice president at Moody’s. “This is a first in what we believe will be broad defaults on commonwealth debt.”

Gov. Alejandro Garcia Padilla has warned that the government and state agencies cannot repay the $72 billion in public debt that hangs over the U.S. territory, which is struggling with a nearly decade-long economic slump.

Garcia’s administration has pushed for the right for Puerto Rico public agencies to file for bankruptcy under Chapter 9, which officials say would allow an orderly restructuring of the debt, but the proposal has not drawn any Republican cosponsors in the U.S. Congress. The White House has said that no federal bailout is planned.

Puerto Rico is nearly 10 years into a deep economic slump, with a jobless rate exceeding 12%. It has tried to boost revenue by increasing the sales tax to 11.5%, higher than that of any U.S. state, and closing government offices. Its debt-burdened power utility already charges rates that on average are twice those of the mainland, and is under pressure from bondholders to raise them higher.

If defaults continue, analysts say, Puerto Rico will face numerous lawsuits and increasingly limited access to markets, putting an economic recovery even more out of reach.

A list of cost-cutting measures proposed by a group of hedge funds that holds $5.2 billion of Puerto Rico’s debt has riled islanders: laying off teachers, cutting Medicaid benefits and reducing subsidies to the main public university.

Meanwhile, a report commissioned by the government called for wage levels to be set below the federal minimum, paid holidays cut and energy costs reduced.

U.S. open-end municipal bond funds own more than $11.4 billion of Puerto Rico’s debt, and hedge funds hold about one-third. Research firm Morningstar Inc. said investors probably would face more volatility and cuts to their investments.

“Puerto Rico is far from out of the woods,” it said. “It’s clear that this is setting up to be a long and complicated ride.”