Puerto Rico governor declares emergency at Government Development Bank

SAN JUAN (Reuters) - Puerto Rico’s Governor Alejandro Garcia Padilla declared an emergency at the island’s Government Development Bank (GDB) on Saturday, suspending its lending power and freezing most withdrawals as the bank struggles to avoid default on a crucial May 1 debt payment.

Puerto Rico's Governor Alejandro Garcia Padilla addresses the audience at the capitol building in San Juan, in this February 29, 2016 file photo. REUTERS/Alvin Baez/Files

The announcement followed Garcia Padilla signing a law this week authorizing him to take steps to avoid receivership at the GDB, the U.S. territory’s primary fiscal agent, and prevent a run on the bank.

Puerto Rico faces $70 billion in total debt, a 45 percent poverty rate and a shrinking population. Garcia Padilla has said the GDB cannot afford the looming payment. While the island has defaulted on small debt payments in the past, a default at GDB would be the most serious yet.

This week’s order prevents GDB’s depositors, such as municipalities and public agencies, from withdrawing their money, except to fund essential services.

It also suspends minimum reserve requirements at GDB, and prevents the bank from lending money or making payments on debts that it guarantees.

However, Garcia Padilla declined to exercise his authority to declare a moratorium on GDB’s own $422 million May 1 debt payment, citing continuing restructuring talks between GDB and its creditors.

“The Executive Order establishes reasonable and necessary procedures to preserve liquidity at GDB and allow it to continue its operations for the benefit of the health, safety and welfare of the people,” he said in the statement.

The essential services still allowed for withdrawal, in order of priority, include certain federal funds, payroll, and money for police, fire, medical, education and disaster recovery operations. The order establishes a committee of top island officials to manage these disbursements.

Local efforts by GDB and other Puerto Rican debt issuers to reach a debt restructuring are running in parallel with plans in the U.S. Congress to draft legislation aimed at solving the island’s economic crisis, possibly by allowing it to restructure debt and putting its finances under federal oversight.

A new draft of that legislation is expected next week from the U.S. House Committee on Natural Resources.

Some Puerto Rico bondholders have criticized Garcia Padilla’s emergency legislation, particularly the authority to issue a moratorium on any debt the governor deems necessary.

Daniel Hanson, an analyst at Height Securities, said in a note this week the law could draw lawsuits from creditors.

Rating agency Moody’s said in a note on Friday that it would define a non-payment at GDB as a default “regardless of (a debt) moratorium law’s provisions.”

Reporting By Nick Brown in San Juan; Editing by Daniel Bases, Tom Heneghan and Bill Rigby