'There is no US precedent for anything of this scale or scope'

Puerto Rico's Governor Alejandro Garcia Padilla REUTERS/Alvin BaezPuerto Rico’s Governor Alejandro Garcia Padilla delivers his state of the Commonwealth address at the Capitol building in San Juan, Puerto Rico April 30, 2015.

The governor is warning that Puerto Rico can’t pay its $US72 billion public debt, delivering another jolt to the recession-gripped U.S. island as well as a world financial system already worrying over Greece’s collapsing finances.

Gov. Alejandro Garcia Padilla is hoping to defer debt payments while negotiating with creditors, spokesman Jesus Manuel Ortiz said Sunday night.

The comments came as legislators debate a $US9.8 billion budget that calls for $US674 million in cuts and sets aside $US1.5 billion to help pay off the debt. The budget has to be approved by Tuesday.

“There is no other option. I would love to have an easier option. This is not politics, this is maths,” Garcia said, according to the New York Times.

Puerto Rico’s bonds were popular with U.S. mutual funds because they were tax-free, but hedge funds and distressed-debt buyers began stepping in to buy up debt as the island’s economy worsened and its credit rating dropped.

Some legislators were taken aback by Garcia’s comments, including Rep. Jenniffer Gonzalez, spokeswoman for the main opposition party.

“I think it’s irresponsible,” Gonzalez said. “He met privately with The New York Times last week, but he hasn’t met with the leaders of this island.”

Puerto Rico’s constitution dictates that the debt has to be paid before any other financial obligation is met. If Garcia seeks to not pay the debt at all, it will require a referendum and a vote on a constitutional amendment, she said in a phone interview.

Just months ago, Puerto Rico was considering borrowing up to $US2.9 billion. But more recently, Garcia Padilla commissioned a study of the country’s current situation by former officials at the IMF and World Bank, according to the New York Times, which obtained a confidential copy.

“There is no U.S. precedent for anything of this scale or scope,” according to the aforementioned report.

This report also “seems aimed at the Obama administration and Congress, both of which have taken a largely hands-off approach to Puerto Rico’s fiscal problems. United States Treasury officials, however, have been advising the island’s government in recent months amid the worsening fiscal situation,” according to the NYT.

Puerto ricoReuters/Alvin BaezA man waves a national flag as protesters march through San Juan May 13, 2015. University students and employees took to the streets to protest against government plans to implement cuts to public university budgets, according to local media.

Puerto Rico’s governor recently confirmed that he had considered having his government seek permission from the U.S. Congress to declare bankruptcy amid a nearly decade-long economic slump. His administration is currently pushing for the right for Puerto Rico’s public agencies to file for bankruptcy under Chapter 9. Neither the agencies nor the island’s government can file for bankruptcy under current U.S. rules.

Puerto Rico’s public agencies owe a large portion of the debt, with the power company alone owing some $US9 billion. The company is facing a restructuring as the government continues to negotiate with creditors as the deadline for a roughly $US400 million payment nears.

Garcia has taken several measures to help generate more government revenue, including signing legislation raising the sales tax to 11.5 per cent and creating a 4 per cent tax on professional services. The sales tax increase goes into effect Wednesday and the new services tax on Oct. 1, to be followed by a transition to a value-added tax by April 1.

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