Puerto Rico Passes Law That Freezes The Island's Debt Payments

Enlarge this image toggle caption Christopher Gregory/Bloomberg via Getty Images Christopher Gregory/Bloomberg via Getty Images

Puerto Rico's governor has signed a bill that puts the island's debt payments on hold until January 2017. Gov. Alejandro Garcia Padilla says the island's first priority is covering payments for essential services.

Puerto Rico acted this week following reports that a key financial institution, the Government Development Bank, is nearly insolvent. A group of hedge funds went to court to block public agencies from withdrawing funds from the bank. Within hours, the Legislature moved to pass the debt moratorium by approving the measure.

The law suspends all bond payments, including general obligation bonds, which are guaranteed by the island's constitution. It also limits activity at the government bank and allows it to enter into receivership if necessary. The bank is facing a May 1 deadline, when a $400 million-plus payment is due.

While the Legislature was meeting, a group of creditors who hold general obligation bonds were in San Juan to pursue a deal to restructure some $5 billion of the island's debt. The head of the Government Development Bank rejected their proposal, saying, "It is exactly the type of 'Wall Street' solution that led us to the precipice we are now looking over."

Creditors say the measure violates prior agreements and the island's constitution. But the action buys the Garcia administration time and increases pressure on the U.S. Congress to help the island find a way to repay its debt. The U.S. House Natural Resources Committee is working on a bill that would establish a control board to oversee the island's finances and help it restructure its debt payments. It's facing opposition from creditor groups who fear it will give the island too much leverage and allow Puerto Rico to impose repayment terms that bondholders don't like.

Puerto Rico has been caught in a recession for most of the past decade. A series of administrations used bond revenue to cover budget deficits, building a debt load that's now more than $70 billion. The poor economy has led Puerto Ricans to flee the island, most for the U.S. mainland. Last year, according to the Pew Research Center, 84,000 people left for the mainland U.S.