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 The report, which was obtained by Reuters, gave a damning review of
how Puerto Rico has arrived at its current state, which it said
requires both structural reform and debt restructuring to fix.
"Puerto Rico faces hard times," the report said. "Structural
problems, economic shocks and weak public finances have yielded a
decade of stagnation, outmigration and debt... A crisis looms."
The report even suggests the restructuring of general obligation
debt, which could be a precedent-setting move as investors usually
regard as sacrosanct.
Social reforms proposed include suspending the minimum wage and
reducing electricity and transport costs. The island must overcome a
legacy of weak budget execution and opaque data, the report said.
Puerto Rico Governor Alejandro Garcia Padilla is expected to give a
televised address on Monday, according to local media, and officials
said they expected to discuss the report with him during the day.
The island is struggling with a $73 billion debt load and faltering
economy while its Government Development Bank is running low on
cash. It is facing crunch time this week with several bond payments
due while its struggling power utility PREPA is in talks to avoid a
possible default.
The report was written by former IMF economists, who were engaged in
February by the Government Development Bank to analyze the island's
economic and financial stability and growth prospects.
The document, first posted on Puerto Rico media websites, was
verified as authentic by one of the authors.
The governor's office and a spokesman for the Government Development
Bank were not immediately available for comment. The report is
expected to be officially released on Monday.
It said Puerto Rico would need to seek relief from principal and
interest payments falling due from 2016 to 2023.
A debt restructure could be achieved via a voluntary exchange of
existing bonds for new ones with a longer or lower debt service
profile, the report said.
The island has the scope to raise revenue by $4 billion and save
$2.5 billion annually by 2025, it said.
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The report said any restructuring of general obligation, or central
government debt, would set a precedent as "no U.S. state has
restructured (such debt) in living memory" and said any attempt
would face legal challenge. However, it said there are limits to how
much more expenditures can be cut or taxes raised.
According to the report, Puerto Rice has 10 percent more teachers
than a decade ago while student numbers have dropped 40 percent.
The New York Times on Sunday cited Governor Padilla saying that the
island's debts were not payable and that creditors would probably
have to take significant concessions such as five-year payment
deferrals.
This coming week "is the tipping point," said Adam Weigold, senior
portfolio manager at Eaton Vance, on Friday.
Puerto Rico's debt problems could lead to a reduction in government
services, investors said. However, a source familiar with the
situation said on Friday the island is not contemplating a partial
or full shutdown of government services.
"Next week is probably a good buying opportunity," said Daniel
Hanson, analyst at Height Securities, on Friday. "We expect a lot of
downside in all the bonds."
Puerto Rico’s benchmark general obligation bonds issued in March
2014 slid on Friday to close at a record low of 77 cents on the
dollar to yield 10.84 percent.
(Reporting by Megan Davies and a contributor in San Juan; Additional
reporting by Edward Krudy; Editing by Toni Reinhold and Richard
Borsuk)
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