SAN JUAN, (Reuters) – Puerto Rico’s governor yesterday signed an emergency bill allowing the government to halt payments on its debt, throwing into doubt broader restructuring plans to stave off a financial collapse of the U.S. territory.
The measure, which earlier passed Puerto Rico’s legislature, lets Governor Alejandro Garcia Padilla declare a moratorium on any debt payment he deems necessary and could alter the structure of the Government Development Bank (GDB), the island’s primary fiscal agent.
“This legislation provides us with the tools to address the highest priority of needs – providing essential services to our people – without fear of retribution,” Garcia Padilla said in a statement.
Puerto Rico, burdened by a $70 billion debt load it says it cannot pay, a 45 percent poverty rate and shrinking population, faces economic collapse without measures that either change its laws or involve an agreement with creditors.
Wednesday’s emergency law was rushed into existence as the GDB faces possible default on a $422 million debt payment due on May 1. Garcia Padilla had said he would consider a debt moratorium ahead of that deadline.
GDB and its creditors are trying to work out a consensual restructuring.
But the new law could spark “a new era of litigation” from creditors, said Daniel Hanson, an analyst with Height Securities. “We believe the overwhelming majority of Puerto Rican issuers have violated their creditors’ rights,” he said in a Wednesday note.
Some GDB creditors on Monday sued to prevent a run on the bank, asking a federal court to block depositors from taking out their money while talks continue.
The passage of the law drew a quick rebuke from some creditors. Stephen Spencer, a financial adviser to bondholders including OppenheimerFunds and Franklin Advisers, said it might violate the terms of a prior restructuring deal at PREPA, the island’s power utility.
That deal, under which creditors agreed to take 15 percent repayment cuts, “should be explicitly preserved, rather than being cast into a state of uncertainty,”