A Caribbean fuse

On the verge of a tumultuous descent

FOR more than two years Alejandro García Padilla, Puerto Rico’s governor, told the island’s creditors what they wanted to hear. The autonomous American territory, he said, had a “moral obligation” to service its $72 billion debt. It could not default on its “general-obligation” bonds, he added, because its constitution gives payments on them priority over all other expenses. He called attention to his record of tax increases and spending cuts. But after 30 months of reassurances, the governor reversed course this week and announced that he would seek to restructure Puerto Rico’s liabilities. “The public debt…is unpayable,” he declared on June 29th. “This isn’t about politics. It’s about math.”

Mr García Padilla demanded a multi-year moratorium on debt service. “The alternative”, he says, “would be a unilateral and unplanned non-payment of obligations.” Puerto Rican bond yields duly soared, and shares in the island’s banks, which own lots of the bonds, plunged.

Mr García Padilla’s announcement coincided with the release of a report by Anne Krueger, a former IMF official,...

from The Economist: Finance and economics http://ift.tt/1gcMuFL