MELISSA BLOCK, HOST:
Puerto Rico, which has been struggling with more than $72 billion of debt, has missed an important deadline. It failed to make a $58 million bond payment. NPR's Greg Allen reports this is the first time Puerto Rico has skipped a debt payment, and it's not likely to be the last.
GREG ALLEN, BYLINE: Puerto Rico's governor, Alejandro Garcia Padilla, warned this would happen in June when he called the U.S. territory's $72 billion debt unpayable. Daniel Hanson, an analyst with Height Securities, calls today's nonpayment a watershed moment for the island.
DANIEL HANSON: What it does is indicate that there are more defaults coming and that Puerto Rican investors should start to prepare for the fallout from a broader restructuring.
ALLEN: There are a few things to note about Puerto Rico's failure to pay principal and interest due on its Public Finance Corporation bonds. Technically, it may not be a default. Puerto Rico has issued well over a dozen type of bonds over the years to cover government deficits. The Public Finance Corporation debt is what's known as moral obligation bonds. Michael Comes, with Cumberland Investors, says about $1.1 billion of the bonds were sold, and the prospectus was clear.
MICHAEL COMES: What the language said was, we are going to promise to make these payments, but there's no guarantee that we keep this promise.
ALLEN: The bond-rating agencies Moody's and Standard and Poor's have said they do consider Puerto Rico in default. At the same time it was defaulting on that payment, Puerto Rico did produce $169 million due on other government debt last week. Comes says the commonwealth made a decision to default on its Public Finance Corporation debt payment because of the weak protections available to investors. Even so, those investors are now likely to go to court, and Comes says it may be a lengthy and convoluted legal battle.
COMES: You have hundreds of thousands of creditors. You don't really have a solid legal foundation for bankruptcy. It's going to be very, very difficult.
ALLEN: Puerto Rico's economy has been in recession now for nearly a decade. Tens of thousands of people have been leaving the the island each year recently, many headed to New York and Florida. Puerto Rico's governor has appointed a task force that's trying to negotiate a multiyear moratorium on debt payments while the island works to rebuild its economy. That plan is expected by the end of the month. But if Puerto Rico ends up facing its creditors in court, a judge may order the island's government to adopt spending cuts and tax increases it's been trying to avoid.
RAMON LUIS NIEVES: Puerto Rico wants to pay its debts.
ALLEN: Ramon Luis Nieves is a member of the ruling Popular Democratic Party and a senator. He's concerned austerity measures imposed by a court would be a blow to the island, its economy and its people.
NIEVES: We don't want to destroy the government that provides services to the people. We don't want to destroy our people in order to pay for a public debt.
ALLEN: The head of Puerto Rico's Government Development Bank today said the administration decided to skip the bond payment to make sure there's enough cash on hand to maintain essential services on the island. Bank CEO Melba Acosta said the government did use $628,000 the Public Finance Corporation had available to make a payment. That's a little more than 1 percent of the $58 million owed. Greg Allen, NPR News. Transcript provided by NPR, Copyright NPR.
