Gov. Alejandro Garcia Padilla announced that Puerto Rico's government will not make a $420 million bond payment due Monday, after a failure to negotiate a legal or political solution to the U.S. territory's public debt crisis.
Garcia said Sunday that he had issued an executive order suspending payments on debt owed by the island's Government Development Bank, the largest component of $470 million in bond payments due Monday.
Island officials spent the weekend trying to negotiate a settlement that would have avoided the default but apparently came up short. The development comes as Congress has so far been unable to pass a debt restructuring bill for Puerto Rico.
"Let me be very clear, this was a painful decision," Garcia said in a speech. "We would have preferred to have had a legal framework to restructure our debts in an orderly manner."
He said Puerto Rico's government could not make the payment without sacrificing basic necessities for the island's 3.5 million residents, including keeping schools and public hospitals open. He said Puerto Rico already is struggling to provide fuel for police and fire vehicles.
"We will continue working to try to reach a consensual solution with our creditors," he said. "That is one of our commitments. But what we will never do is put the lives and safety of our people in danger."
The governor had been warning since last year that the island's overall public debt of more than $70 billion is unpayable.
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Puerto Rico has been suffering through more than a decade of economic decline since Congress phased out tax cuts that had made the island a center for pharmaceutical and medical equipment manufacturing. Garcia's predecessors and the island legislature borrowed heavily to cover over budget deficits, causing a debt spiral that has already prompted several smaller defaults.
Creditors have accused the government of exaggerating the crisis to avoid upcoming payments such as $780 million due July 1 that includes general obligation bonds, which are guaranteed by the constitution.
Economists have warned that a default of this magnitude could cause Puerto Rico to lose access to capital markets and make the situation worse as the government faces the much larger payment due July 1.
U.S. legislators have delayed approving a bill that would provide Puerto Rico with a debt-restructuring mechanism and implement a fiscal control board. As action on that bill lagged, Garcia signed a bill into law that allowed him to declare the debt payment moratorium.