SAN JUAN, Puerto Rico (AP) - Puerto Rico's financial future hung in limbo Tuesday as economists and officials warned that the U.S. territory could head down Greece's path if it is not allowed to declare bankruptcy as it struggles with $72 billion in public debt.
SAN JUAN, Puerto Rico (AP) — Puerto Rico's financial future hung in limbo Tuesday as economists and officials warned that the U.S. territory could head down Greece's path if it is not allowed to declare bankruptcy as it struggles with $72 billion in public debt.
The island prepared to close a troubled fiscal year amid intense investor scrutiny just hours before the first of several multimillion-dollar debt payments is due. It remained unclear whether the government would meet the roughly $400 million obligation due Wednesday, obtain yet another extension from creditors, or default.
Gov. Alejandro Garcia Padilla has said that the overall debt is unpayable and that he will seek a moratorium on payments, although it is still unknown whether bondholders will agree to that or opt to resolve the issue in court.
"The bombshells that have come down from Puerto Rico in the last two days have not been particularly well orchestrated," said David Tawil, co-founder and portfolio manager of New York-based Maglan Capital. "You really don't do those things without ... wanting to shock the market ... or preparing the market and gaining consensus."
Unlike Greece, Puerto Rico cannot seek emergency financing from an institution because it's a U.S. territory. Some economists say that leaves bankruptcy as the most financially sound alternative.
"Both are in desperate need of a solution, but neither can access the solution they're asking for, which is a bankruptcy process," said Eric LeCompte, executive director of Jubilee USA Network.
He noted that if Puerto Rico were considered a developing country, it would be the eighth most heavily indebted country in the world. If the island does not obtain the right to declare bankruptcy, it will either restructure the debt or go into default, he said.
"That's going to happen," he said. "It's between a rock and a hard place in terms of how to move forward."
Puerto Rico's governor is pushing for the right for the island's agencies to file for bankruptcy under Chapter 9. He also plans to establish a team to come up with a fiscal and economic reform plan to help jumpstart the economy of the island, which is in a nearly nine-year recession. The team has until Aug. 30 to develop the plan, which requires legislative approval.
Some economists including LeCompte warned that imposing too many austerity measures could be detrimental.
"The reality is if you're not going to grow your economy, it doesn't matter how much you tighten your belt," he said.
Like Greece, Puerto Rico can extend the life of its loans as well as try to get bondholders to agree to cut the debt by at least half, LeCompte said. Currently, 70 percent of Puerto Rico's economic output goes toward paying debt, he said.
The White House says no one is contemplating a federal bailout of Puerto Rico, although it has urged Congress to consider changing the law to allow the island's government to seek protection under Chapter 9.
Puerto Rico might obtain that right if officials realize there is no other solution, said John Mousseau, fixed income director at Florida-based Cumberland Advisors.
"You can't drop out and say, 'Hey, we're not going to be in the euro anymore.' Puerto Rico doesn't have that in their arsenal," he said. "Some people say there's nothing the federal government can do for Puerto Rico. That's baloney. It's clearly at some level a congressional problem that they're doing nothing about."
Puerto Rico and Greece do share one disadvantage in fighting economic trouble: They can't devalue their currencies to give their companies a price advantage in world markets and jump-start economic growth with exports. Puerto Rico uses the U.S. dollar and Greece is one of 19 countries that use the euro.
But Puerto Ricans have an edge over the Greeks in that their economy is fully integrated into the United States. The U.S. government supports Puerto Rico with Social Security and Medicare payments; the Greeks don't get nearly as much support from European institutions.
"You've got a great deal of fiscal transfers that come from Washington that you don't have in Greece," said John Chambers, managing director of sovereign ratings at Standard & Poor's Ratings Services. "You don't have the same type of integration on the fiscal side."
Puerto Ricans can move anywhere in the United States and send money back home to support their families. Greeks have the same freedom to move around the European Union, but language barriers discourage them from doing so.
Associated Press writer Paul Wiseman in New York contributed to this report.
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