After Puerto Rico's first major debt default, Governor Alejandro Garcia Padilla warned that the island will fall "into the hands of judges here and abroad" and demanded that the U.S. Congress needed to act to solve a "mess" partly of its own creation.
On Sunday the Caribbean island commonwealth failed to pay $367 million in debt on behalf of the Government Development Bank, the governor announced. A payment of $22 million in interest was made, and a deal was worked out to delay $33 million debt of local cooperatives until 2017.
"There will be countless litigations. We have to worry about the consequences of litigations as we are going to fall into the hands of judges here and abroad," noted Garcia Padilla at a press conference in which he explained his decision impose a debt Moratorium Act, activated on Sunday.
"Congress put us in this mess," the governor said, noting that the Commonwealth of Puerto Rico was excluded from Chapter 9 bankruptcy protection which other states are eligible for.
Puerto Rico's debt is around $70 billion. The island has borrowed in financial markets amid a recession that has lasted for a decade and a difficult economic environment that shows no signs of improvement.
If the U.S. Congress does not pass a mechanism allowing the island to restructure its debt, Puerto Rico will default on payment of its secured debt,which is unprecedented in its history of the territory and is likely to bring an onslaught of lawsuits.
The bonds are key to the market as they are protected by the Constitution which stipulates that their payment is a priority for the Puerto Rican government.
"It is up to Congress to act ... It is up to Congress to show that respect is mutual," said Garcia Padilla. "If they do not, we'll be ;eft to do it on our own."
In late April, the U.S. Treasury Secretary Jacob Lew told Univision News "there is an urgent need for Congress to act, because the alternative ... is chaos for 3.5 million Americans. That is unacceptable. "
The governor has been emphatic in rejecting a proposal to create a federally appointed financial control board.
"A board does not solve anything ... Good thing the soldiers of the 65th Infantry Regiment had more courage," he said when comparing congressional inaction to the Puerto Rican soldiers who fought in both World Wars and the Korean War.
Future debt payments larger
"The decision I made yesterday was very difficult and very sad for me," he said. "I wanted to be the governor who made monumental works, but I had to be the governor who handled the fiscal crisis," he said.
Going forward, a payment of $2 billion comes due in July, of which $744 million corresponds to the so-called general obligation bonds or (GO). "It's not anticipated that we will have the money. We invite (creditors) who approach us in good faith."
Asked why he doesn't make more cuts in government spending, Garcia Padilla said he had already reduced it to the level it was before entering recession. "It has not been easy," he emphasized.
The Moratorium Act, passed in April, allows the governor to declare a state of fiscal emergency, defaulting on outstanding payments to creditors and to manage cash on hand in the Government Development Bank.
This does not prevent the government from contining negotiations with its creditors, he said.