Hurricane warning

Rainy days ahead

IT WAS barely a month ago that Alejandro García Padilla, the governor of Puerto Rico, first asserted that the American territory’s $72-billion public debt was unsustainable. At the time, his warning that the only alternative to a comprehensive restructuring was a “unilateral and unplanned non-payment of obligations” was seen by most as a spur to negotiations with creditors. But on August 3rd Puerto Rico’s Public Finance Corporation (PFC), a government agency, failed to make a $58m payment to bondholders. “We don’t have the money,” explained Víctor Suárez, the governor’s chief of staff.

The PFC depends on the island’s legislature to appropriate funds to service its debts. But following a decade of uninterrupted recession, lawmakers were unwilling to extract more revenue from taxpayers. A loss of faith among investors, meanwhile, has left them unable to tap the capital markets. As a result, the PFC only managed to send off $628,000. Moody’s, a rating agency, promptly announced that it considered the bond in default.

The PFC’s missed payment is unlikely to set off an immediate cascade of...

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