Almost six months to the day since Puerto Rico Governor Alejandro Garcia Padilla declared that the Commonwealth could no longer service its $72 billion dollars in debt, resolution to the crisis remains elusive even as economic conditions continue to deteriorate on the island.
In a surprise move, Puerto Rico's government on Tuesday made a $354 million dollar bond payment due today, but warned it faces a severe liquidity shortage that could result in a humanitarian crisis without help from Washington. Over the next several weeks, the island faces hundreds of millions of dollars in additional bond payments that officials say they are unable to make.
"We have no cash left," Padilla told the U.S. Senate Judiciary Committee at a hearing today on the island's debt crisis. The Commonwealth announced in a statement that it would re-direct incoming revenues, previously earmarked for bond payments, to fund essential government operations.
The rating agency Moody's recently expressed doubts Puerto Rico could make yet another $330 million bond payment due January 1.
The island in August defaulted on a bond payment, and in July its legislature voted to suspend payments on its general obligation bonds in order to make the government's $250 million dollar bi-weekly payroll. With almost a quarter of a million public workers, close to one in four of the jobs on the island are in the government sector.
Puerto Rico's economy has continued to deteriorate even as Washington and local officials search for a solution. Real estate in the Commonwealth has lost 25 percent of its value since 2007. The unemployment rate tops 12 percent, compared with 5 percent for the U.S. as a whole. The World Bank estimates that its labor force participation rate is now a meager 42.6 percent, underscoring the island's severely depressed job market. According to the Pew Research Center and the latest U.S. Census data, well over 200,000 people have left the island between mid-2010 and 2014, a rate of out-migration not seen since World War II
"On the ground we are dealing with a humanitarian crisis," said Eric LeCompte, executive director of the Jubilee USA network, a non-profit faith-based group that that works to secure debt relief for struggling nations. "Nearly 1 out of 2 people lives in poverty. Because of self-imposed austerity, we've seen 100 schools close. The hardest thing to get right now in Puerto Rico is a suitcase because too many people are leaving the island."
The Senate Judiciary Committee, chaired by Senator Chuck Grassley, R-Iowa, on Tuesday will hear testimony on pending legislation that would allows Puerto Rico's government to seek Chapter 9 bankruptcy protection. Under current law, that option is available only to U.S. municipalities like Detroit, which filed for court supervision in 2013.
Earlier this year, Grassley testified that he believed Congress should also consider exempting Puerto Rico from the federal minimum wage law and the Jones Act, a law that mandates only U.S. flagged ships bring cargo to Commonwealth ports. There is some bipartisan support for both proposals, which advocates say would reduce the cost of doing business in Puerto Rico and help stimulate the island's economy.
Some hedge funds and bondholders are pushing back on the proposal to permit Puerto Rico to seek bankruptcy protection, arguing that it would cheat investors of the return on their investment the Commonwealth had represented they would receive.
Instead, the investors want to see Puerto Rico make budget cuts and improve fiscal controls so as to keep bondholders whole. Backers of the bondholders are touting a report prepared by consulting firm Centennial Group International on behalf of 34 hedge funds with financial interests in Puerto Rico. Key findings include that over the last 10 years, while spending on education jumped 39 percent, school enrollment dropped 25 percent. According to the report, Puerto Rico collects only 56 percent of the sales tax it's owed, compared to the 83 percent average collection rate for the 50 states.
"What Detroit showed is that investors who buy government bonds should not expect to be treated like bondholders in a private company," said Michael Santoro, professor of management and global business at Rutgers. "Investing in government bonds is risky and only as good as the full faith and credit of the entity you are investing in. If Puerto Rico defaults on its bonds, they will get new investors to invest. So the hedge funds hold a very weak hand if they are trying to push Puerto Rico around."
"There is fault everywhere on this, including in Washington," said Ted Palatucci, a municipal bond analyst with Andres Capital Management. "Congress has got to let them have access to the bankruptcy court to work this out."
Palatucci said a deal reached earlier this year between investors and Puerto Rico's Electric Authority, which has $9 billion in outstanding debt, offers a template for a "grand bargain" for the larger crisis. "So investors had to take a 15 percent haircut. But all things considered they are still getting double the yield of U.S. treasuries," he said.