Yesterday, in the latest plot twist surrounding the inevitable Puerto Rico default, we observed that after the commonwealth island's Senate passed a surprising bill to impose a debt moratorium on any future debt repayment, its bonds - predictably - tumbled.
We also noted that the legislation addressed the Government Development Bank, or GDB, which is facing speculation that it’ll lapse into insolvency. The bank’s receivership process, liquidity and reserve requirements and payment obligations would be suspended indefinitely, according to an analyst's read of the bill, which also seeks to split the entity into a “good bank” and “bad bank."
Hedge funds holding debt in the GDB sued on Monday to stop the bank from returning deposits to local government agencies as it faces a growing cash shortage. The funds, which include affiliates of Brigade Capital Management, Claren Road Asset Management and Solus Alternative Asset Management, accused the bank of seeking to “prop up” local agencies at the expense of other creditors. The GDB has a $422 million debt-service payment due May 1.
The Government Development Bank serves the dual purpose of providing financial support to local governments and acting as a financial adviser to the commonwealth. The funds, which say they hold a “substantial amount” of almost $3.75 billion in the bank’s outstanding debt, blamed the entity’s deteriorating condition on a “hopeless conflict” between loyalties to Puerto Rico and to creditors.
Fast forward to today, when Puerto Rico Governor Alejandro García Padilla signed a measure into law Wednesday that would enable him to declare a moratorium on the commonwealth’s debt payments, mere hours after it cleared the Legislature amid concerns of securing enough support in the lower chamber and a full-court press by creditor lobbyists demanding changes to the bill.
What was more troubling is that in a move similar to what we have seen in Greece, only this time a voluntary one on behalf of the island and not its vassal owners (as happened with Greece), the newly signed Puerto Rico Emergency Moratorium & Financial Rehabilitation Act also empowers the governor to order the financially battered Government Development Bank (GDB) to restrict the outflow of cash in a bid to stabilize its dwindling liquidity levels, which stood at roughly $560 million as of April 1, according to the bill.
In other words, capital controls.
This, incidentally, confirms what we said yesterday, when we concluded that "the situation is getting messier by the day with a compromise deal now seemingly impossible - absent a US government bailout - and meanwhile Puerto Rico's money is running out, which will ultimately be the decisive catalyst that leads to the next step in the crisis."
That moment may have just arrived.
As Caribbean Business writes, García Padilla plans to sign an executive order to this effect immediately following the enactment of the moratorium legislation, sources said.
Several sources told Caribbean Business the urgency to enact the bill stems from concerns that municipalities and other public entities will request the withdrawal of funds each entity holds in the bank, which would further jeopardize the GDB’s operations.
Acting under the Puerto Rico Constitution’s police powers, the law allows the governor to declare a moratorium on the commonwealth’s entire debt, as well as a stay against any litigation that may result. The measure amends, or “modernizes,” the receivership process of not only the GDB, but also of the Economic Development Bank. If the GDB is placed under the new receivership process, a temporary “bridge” bank could be created to carry out some of the GDB’s functions and honor deposits.
The law also creates a new entity, called the Puerto Rico Fiscal Agency & Financial Authority, that essentially takes over the GDB’s roles as the island’s fiscal agent and financial adviser. The entity’s board consists of only one member, and in addition to its fiscal agent duties, will take charge of the commonwealth’s debt-restructuring efforts.