Puerto Rico Denies Bankruptcy Rumors, Need for Federal Bailout

The government of Puerto Rico denied rumors last week that the territory would have to file bankruptcy or turn to the United States federal government to intervene.

Governor Alejandro Garcia Padilla and other leaders participated in a conference call on Tuesday that was open to all investors.  In the call he sought to call fears that the government of Puerto Rico was about to default on its debt.

“We will do everything, and I repeat, everything that is necessary for Puerto Rico to honor all its commitments,” Padilla said.  “It’s not only a constitutional but also a moral obligation.”

Puerto Rico is an unincorporated territory of the United States.  Spain ceded Puerto Rico to the United States in 1898 at the end of the Spanish-American War.

Puerto Rico Plans to Reduce Deficit

Officials on the calls, including Melba Acosta, Treasury Secretary of Puerto Rico, told investors they were taking steps to reduce the budget deficit.  Puerto Rico presently runs at an annual budget deficit of approximately $800 million.  Acosta indicated they plan to trim the annual deficit to half that number in the next two years.

The total budget deficit of Puerto Rico currently stands at approximately $2.4 billion.

Deficit can be Tied to Economy, High Cost of Business

Although officials denied that the United States federal government would need to give Puerto Rico funds to stay solvent, Acosta indicated the United States may establish a committee to identify ways to improve the territory’s economy.

The economy of Puerto Rico is currently in a recession that first began eight years ago.  The unemployment rate in Puerto Rico is at approximately 14 percent, higher than any other state or territory under control of the United States.

In addition, Puerto Rico officials released on the call a five-year plan to leverage the strengths of Puerto Rico’s work force in an effort to improve the economy.  The government is looking to provide tax cuts and other incentives to businesses in certain key industries, including biotechnology, medical and other technology device sales, and pharmaceuticals.  Officials estimate these incentives will create over 9,000 jobs in the next year and as many as 90,000 jobs over the next five years.

However, efforts to lure additional business to Puerto Rico may continue to prove difficult so long as the cost of doing business on the island remains so high.  This is especially true for businesses that consume a great deal of power, given the high energy costs on the island.

Puerto Rico is executing a plan to bring additional power options online in the form of natural gas, but that plan will take several years to complete.

Concerns that Puerto Rico may default on its debt began to surface earlier this year when the Government Development Bank for Puerto Rico would reduce the sale of bonds by potentially over $1 billion for the remainder of the year.  In response to that announcement, investors effectively drove up Puerto Rico’s interest rate to borrow money from 5 percent near the start of 2013 to approximately 10 percent at present.

In an effort to present an open book to investors on the state of the municipality and alleviate investor concerns, officials indicated they would provide revenue numbers on a monthly basis and hold investor calls similar to the one last week every three months.

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Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.