U.S.
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Puerto Rico avoided a default on debt maturing on Tuesday but warned that its deteriorating liquidity meant that future defaults loom.
There had been speculation that the U.S. territory would default on all or part of the $355 million notes issued by its financing arm, the Government Development Bank.
Although Puerto Rico first defaulted in August, failure to make the payment on Tuesday would have been more significant because part of that debt was protected by the commonwealth's constitution.
Another default could have triggered lawsuits, further spooked investors and undermined the island's efforts to climb out of $72 billion in debt.
Puerto Rico said in a statement that it made the payment despite "extreme fiscal challenges." It warned of problems ahead as it will have to "claw back revenues pledged to certain bonds issued in order to maintain public services," Governor Alejandro Garcia Padilla told the U.S. Senate Judiciary Committee on Tuesday.
The commonwealth would use the clawbacks to fund payments on top-priority debt carrying constitutional protections, Garcia Padilla said in written testimony. However, in oral testimony, he said clawbacks could also be used to maintain public services.
"The imminence of a default when presented with the alternative between paying creditors and providing essential government services looms large," Garcia Padilla said.
Garcia Padilla signed an order allowing Puerto Rico to begin redirecting certain funds in light of recently revised revenue estimates and the island's deteriorating liquidity situation, government officials said.
In written testimony, Garcia Padilla said: "In simple terms, we have begun to default on our debt in an effort to attempt to repay bonds issued with the full faith and credit of the commonwealth and secure sufficient resources to protect the life, health, safety and welfare of the people of Puerto Rico."
Height Securities analyst Daniel Hanson said the comments meant Puerto Rico was defaulting on "instrumentality debt, not debt with a constitutional pledge." General obligation bonds, along with bonds that have constitutional guarantees, should be safe, he said, but bonds from entities such as the commonwealth's highway authority and infrastructure financing authority are at risk.
Of the $355 million paid on Tuesday, $81.4 million was to service nongeneral obligation-backed debt and $273.3 million was for notes backed by the commonwealth's general obligation guarantee.
During the Senate hearing on Tuesday, Sen. Richard Blumenthal, a Democrat, said Puerto Rico "narrowly averted a complete default" through unsustainable financial gymnastics.
The payment on bonds issued by the Government Development Bank was crucial as Puerto Rico tries to stretch its liquidity into 2016 to provide more time to restructure debt.
In August, the island defaulted for the first time when its Public Finance Corporation agency paid only $628,000 of a $58 million payment due.
Reuters
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