Puerto Rico will default on its constitutionally-guaranteed debt for the first time, as it is unable to make payments on its $779 million debt to creditors. The nation was supposed to make payments this week, but Governor Alejandro García Padilla argued that it was more important to pay Puerto Rico’s teachers, emergency responders, and to finance other critical needs before the creditor debts can be met.
Puerto Rico will not pay any of the funds that were due to creditors by July 1st. The nation is currently experiencing a dire financial situation, with only about $350 million in its coffers. The default did not come as a surprise to many, considering how little money Puerto Rico currently has. Overall, the island is more than $70 billion in debt ($20,000 per island resident!). Puerto Rico has also defaulted on other bonds in the past.
Puerto Rico says that even if it is able to pay its doctors and teachers, it could still run out of money altogether by August or September of this year.
“[This situation] is really troubling from a creditor point of view,” said Dominic Frederico, CEO of Assured Guaranty, one of the insurers of Puerto Rico’s debt. Assured Guaranty and two other creditors, Ambac Financial Group and National Public Finance Group all have funds set aside for these kinds of situations, but the tidings still are not good.
Puerto Rico’s government has broadcast the message for several weeks that it would not be able to make payments on its loans, as it has not been setting reserves aside. Some speculated that Puerto Rico would simply find a way to make it happen, but Puerto Rico has made no promises to that end.
“The market has been waiting for this default for two years, but really it’s been 15 years in the making,” said Matt Fabian, partner at Municipal Market Analytics, a research firm. “These defaults now are essentially Puerto Rico impounding funds for working capital.” Fabian added that the defaults would “weigh on market psychology regardless of how prepared people are.”
It’s unclear what’s next for Puerto Rico or the creditors, as there is currently no legal stay in place to prevent a court from ordering payments to be made before essential services are financed.