Two months ago, when Puerto Rico’s third largest bank failed costing US taxpayers some $750 million in the process, we noted that Doral Bank wasn’t alone in the world when it comes to having an NPL ratio bordering on 40%:
“It appears that at least in some ways, "Puerto Rico is indeed Greece,” we said.
Less than 60 days later it appears that Puerto Rico is indeed Greece in a lot of ways because as Reuters reports, the U.S. territory faces a looming government shutdown thanks to “the absence of liquidity to operate.”
Puerto Rico's top finance officials said the government of the U.S. territory will likely shutdown in three months because of a looming liquidity crisis and warned of a devastating impact on the island's economy.
In a letter to leading lawmakers, including Governor Alejandro Padilla, the officials said a financing deal that could potentially salvage the government's finances currently looked unlikely to succeed. It warned of laying off government employees and reducing public services
"A government shutdown is very probable in the next three months due to the absence of liquidity to operate," the officials said. "The likelihood of completing a market transaction to finance the government's operations and keep the government open is currently remote."
The letter, dated April 21, was also sent to the heads of Puerto Rico's Senate and House as well as the governor. It was signed by the government's fiscal team, including the head of the Government Development Bank and the Treasury Secretary.
Puerto Rico, which has a total debt of more than $70 billion, is trying to raise $2.95 billion in financing, while pushing through unpopular tax reforms such as a higher value-added tax and increasing a levy on crude oil to help pay for it.
Essentially, tax overhauls are needed in order for hedge funds (who took down a sizeable chunk of a $3.5 billion deal the commonwealth floated last year) to feel comfortable supporting the new bond issue. The letter from the GDB is apparently an effort to shock lawmakers into action before time runs out. As a reminder, here’s a concise summary of the situation via FT:
Even with tax-free yields now just shy of 10 per cent, the Mom-and-Pop savers who bought most of Puerto Rico’s now junk-rated debt, will no longer touch new issues. Instead, the government is reduced to negotiating ever-stricter terms for one-off deals with syndicates of hedge funds.
The commonwealth’s financing arm, the Government Development Bank, is on track to run out of cash by the autumn unless it is able to sell a proposed $2.9bn bond that will be supported by a new tax on crude oil imports. The legislature is holding hearings on the tax, which the governor and investment establishment hope will be enacted by next month.
That’s from February. If the GDB’s timetable proves accurate, we could see “PRimbo” right around the same time Europe witnesses “Grimbo.”