By Edward Krudy
NEW YORK Oct 7 Federal officials are expected
to announce incentives to boost Puerto Rico's economy in the
next few months, a top legislator from the commonwealth said on
Monday, responding to investor concerns about the island's
rising debt costs and bleak growth.
The help is unlikely to include direct financial aid, Puerto
Rico Senate President Eduardo Bhatia said at an investor
gathering in New York. He did not provide specifics.
The assistance would come in response to the last four years
of recession in the Caribbean territory, Bhatia said. It has
been given added urgency due to a spike in Puerto Rico's debt
yields in the recent months, he said.
The selloff in Puerto Rico's bonds has been driven by
worries about the territory's shrinking economy, its high
jobless rate and per capita debt, which are far higher than that
of any U.S. state. The U.S. commonwealth's unemployment rate is
nearly 14 percent, higher than any U.S. state.
"We are waiting to hear an announcement from the Treasury
and the White House. We know for a fact they have been very
aggressively thinking of how to be sure that they can help
Puerto Rico send a very strong signal of stability right now,"
Bhatia told the meeting.
Puerto Rico has about $70 billion of outstanding debt, or
nearly 2 percent of the overall $3.7 trillion municipal bond
market. That dwarfs the $18 billion held by Detroit, which
roiled the muni market when it filed for municipal bankruptcy
earlier this year.
Puerto Rico's debt is held widely by mutual funds,
increasing the systemic risk. The island will not be entitled to
Chapter 9 municipal bankruptcy.
Puerto Rico's debt costs have soared this year. In May,
30-year general obligation bonds carried a yield of about 5.3
percent and hit a peak of 8.6 percent in mid-September. The
debt is now trading with a yield of 8.1 percent, which is far
higher than any U.S. state's. Puerto Rico's debt is rated BBB,
one notch above junk.
Officials in San Juan have embarked on economic reforms
intended to show that the Caribbean territory will pay its
debts, Bhatia said, citing pension reform, changes to tax laws
and a reduced government work force.
Bhatia expressed frustration that investors appeared not to
have recognized the reforms, and instead are punishing Puerto
Rico with higher borrowing costs.
"The kind of reform you are making us do is very tough,"
Bhatia said. "But we are doing it because we want to send a
signal that we are honoring our debt."
Bhatia said even if Puerto Rico were in danger of
defaulting, the commonwealth's constitution stipulates that bond
holders are paid before pensioners and government workers. He
cited the 2006 crisis in which Puerto Rico's bond holders were
paid while government workers were not.
Economic development officials and Puerto Rico Governor
Garcia Padilla have been in talks with the U.S. Treasury and
White House, he said.
A Treasury spokesperson told Reuters on Monday that the
Treasury was monitoring the situation but would not discuss
where the monitoring would lead.
"Given the potential for Puerto Rico's financial challenges
to impact United States markets, including the municipal market,
Treasury continues to closely monitor developments," said the
spokesperson, who did not want to be named.
A senior White House administration official said President
Barack Obama's task force on Puerto Rico has been "working for a
number of years to maximize the impact of federal resources on
"As part of its ongoing work, the task force is coordinating
with federal agencies to strengthen Puerto Rico's fiscal
situation and economic outlook," the official said.
Although details about any federal action were thin,
analysts at Bank of America Merrill Lynch pointed to a $320
million aid package the Obama administration agreed to for
Detroit to help with infrastructure development. In the case of
Detroit, a large portion of the aid, which comes from federal,
state and private sources, was previously earmarked for the city
but delivery was slowed by red tape and other issues.
As one economic development tool, Bhatia noted tax breaks
that some U.S. companies once enjoyed in Puerto Rico.
Federal authorities phased out tax breaks for parent
companies of Puerto Rico-based U.S. manufacturers at the end of
2006. Puerto Rico entered a recession that year and has yet to
There have been some positive signs from Puerto Rico's
economy. Tax revenues for the three months through September
rose by $70 million, or 4.4 percent, to a provisional $1.68
billion, the island's treasury secretary said on Monday. Bhatia
attributed the gain to recent tax reform.