November 9, 2012 / 4:55 PM / in 5 years

UPDATE 1-Puerto Rico's slow pension reforms risk downgrades -S&P

Nov 9 (Reuters) - Standard & Poor’s Ratings Service on Friday said “prolonged inaction” on reforms of Puerto Rico’s ailing government workers pension system by the island’s governor-elect could lead to a one-notch downgrade of Puerto Rico credit ratings.

The Wall Street credit agency said in a statement that Tuesday’s election, in which Alejandro Garcia Padilla narrowly beat Governor Luis Fortuno, may prove crucial to Puerto Rico’s ratings. S&P said no immediate ratings action was seen.

“However, we still believe that there is at least a one in three chance that we may lower these ratings later this year or in early 2013,” S&P said.

S&P rates Puerto Rico’s general obligation debt BBB and its appropriation debt BBB minus; it has negative outlooks on both types of debt.

Garcia Padilla, a senator in the U.S. commonwealth’s legislature, in his gubernatorial campaign often attacked many of Fortuno’s business-friendly policies and promised changes to increase employment and boost Puerto Rico’s stagnant economy.

A big borrower in the $3.7 trillion municipal bond market, Puerto Rico under Fortuno has whittled away at chronic budget deficits but has an estimated $24 billion shortfall in its public pension system that worries bond investors.

“We believe that the governor-elect’s electoral platform and public statements with regard to the commonwealth’s unfunded pension liabilities could result in prolonged inaction on pension reform or the adoption of a diluted pension reform package that provides only temporary relief to the pension system,” S&P said.

“Either of these two potential outcomes would result in a one-notch downgrade to our ratings in the next few months, with the potential for additional deterioration within the next year, particularly if the economy continues to grow at a relatively slow pace, or the commonwealth’s liquidity and market access is compromised.”

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