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UPDATE 1-Fitch says policy decisions key for Puerto Rico debt
December 18, 2012 / 11:11 PM / in 5 years

UPDATE 1-Fitch says policy decisions key for Puerto Rico debt

Dec 18 (Reuters) - Fitch Ratings on Tuesday said its BBB-plus rating on Puerto Rico’s debt rests largely on fiscal progress made by the U.S. commonwealth’s outgoing government and may be affected by possible policy shifts by Governor-elect Alejandro Garcia Padilla.

“Maintenance of the rating will require policy decisions that continue this progress and achieve budget balance and a slowing in the growth of long-term liabilities, including passing significant pension reform,” Fitch said in a statement.

Another leading Wall Street ratings agency, Moody’s Investors Service, last week cut Puerto Rico’s overall credit rating to near-junk status and warned it was weighing future downgrades. The decision by Moody’s affected $38 billion of outstanding debt and was linked to Puerto Rico’s weak economic outlook and worries about its underfunded pension system.

Puerto Rico, whose economy seems to be just barely emerging from a six-year recession, will be hampered by slow growth and unemployment that runs at twice the mainland United States rate, Fitch said.

“Initiatives by the new administration will be monitored to assess the direction of policy as it evolves and any implications for the financial stability of the commonwealth,” Fitch said.

Worries about Puerto Rico’s high debts have grown broader and deeper in America’s $3.7 trillion municipal debt market, where the Caribbean island’s debt is widely held.

The spread for 30-year Puerto Rico general obligation debt over AAA-rated 30-year issues has more than doubled to about 275 basis points this week from 130 in early 2011, according to a report by analyst Daniel Berger of Municipal Market Data.

MMD said that despite the sharp drop in the prices of Puerto Rico’s bonds, it was still too early to consider investing in its debt.

“We know that Puerto Rico’s bonds could rebound but the question here is timing” the note said.

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