Puerto Rico's Governor: Island's Debts Are 'Not Payable'

Puerto Rico cannot pay its $72 billion in debts, and its creditors will have to shoulder part of the burden, The New York Times reports.

"The debt is not payable," Gov. Alejandro García Padilla said. "There is no other option. I would love to have an easier option. This is not politics, this is math."

García Padilla and his staff said they likely would see significant concessions.

The U.S. territory has more municipal bond debt per capita than any state, the Times noted, and the market already has been hit by municipal bankruptcies in Detroit, Stockton, California and others. As a commonwealth, Puerto Rico isn't allowed to enter bankruptcy.

The governor said the impoverished island cannot afford to keep asking its residents to sacrifice with tax hikes and pension cuts, so the debt holders, many of which are private investors in the United States, will have to step up.

Puerto Rico is set to release a report on its financial stability early next week as several fiscal deadlines loom, a source familiar with the situation said on Friday, which could point towards a fix for the island but has the potential to rattle bond prices.

Puerto Rico, struggling with a $73 billion debtload, is facing crunch time with a deadline to agree a budget as well as a July 1 deadline to make a $655 million payment on its general obligation debt while its struggling utility PREPA faces a $400 million payment.

"(Next week is) the tipping point," said Adam Weigold, senior portfolio manager at Eaton Vance, which owns some Puerto Rico insured bonds. "We will see if (the problems) get kicked down the road, or whether Puerto Rico and the bondholders deal with the reality of the situation right now."

Puerto Rico's debt problems could lead to a reduction in government services, investors said. However, the source said the island is not contemplating a partial or full shutdown of government services.

Puerto Rico in February engaged a group of former International Monetary Fund economists to analyze its economic and financial stability and growth prospects. A separate report was also commissioned by consulting firm Conway MacKenzie.

The IMF report is expected to be released early next week, likely on Monday, the source said. The timing of the Conway MacKenzie report was unclear.

Puerto Rico's government chief of staff and Conway MacKenzie were not immediately available to comment.

Daniel Hanson, analyst at Height Securities, said it would be a "watershed moment" and said the reports would allow the island to give an "opening bid" to creditors regarding a possible restructuring of the debt.

"Next week is probably a good buying opportunity," Hanson said. "We expect a lot of downside in all the bonds and a knock-on effect on the monolines (insurers of those bonds)."

Puerto Rico's benchmark general obligation bonds issued in March 2014 slid to close out the week at a record low of 77 cents on the dollar to yield 10.84 percent.

Hanson predicted that the Conway MacKenzie report would show a $3.5 billion cashflow deficit for the coming fiscal year for Puerto Rico, making providing full government services while simultaneously meeting all its debt obligations impossible.

And he forecast that the IMF report would prioritize pro growth initiatives such as reforming the tax code.

Puerto Rico's troubles have deepened in recent weeks with a decline in cash levels to "distressing levels" at its Government Development Bank (GDB), according to John Miller, co-head of fixed income for Nuveen Asset Management, which has Puerto Rico par value exposure of around $330 million. That was coupled with the resignation of that bank's chief executive David Chafey who was "highly regarded," according to Miller.

"The number one issue in the near term is the cash balance at the GDB," said Miller. "That's the number one catalyst for what comes next."

The commonwealth has not received any promise of financial support from the U.S. Treasury, although it has had months of talks with Treasury to seek options for financial help, the source said.

Federal policy experts are monitoring the situation and sharing expertise with Puerto Rican officials, said a U.S. Treasury official. "These efforts should not be interpreted as any kind of federal intervention."