Moodys chief Puerto Rico analyst Ted Hampton talks about his expectations for Puerto Ricos debt crisis over the next few months.
Certainly not paying out the 400 million dollars of scheduled principal that was due on series 2011-B senior notes of GDB, does prevent that amount of cash depletion. The problem is, it's not a sustainable strategy. It's akin to a consumer who decides to cut expenses by not paying monthly bills. In this situation, Puerto Rico is doing something a little bit similar. It's in a very difficult position of having to choose between paying bond-holders and providing for what it deems to be essential services. That $400 million is to the extent that it exists needed for essential services, anyway.
Moreover, the government development banks available cash would have been virtually wiped out if Puerto Rico had made those payments. We continue to believe that there's a very good argument for and a strong likelihood of a federal role in this crisis.This particular incident could add to the political pressure in favor of passing legislation such as the bill that's come out of the house Natural Resources Committee. When that happens, of course, remains unclear but the largest default yet in this situation could accelerate things. We'll have to wait and see when Congress comes back what happens.
It's not surprising this has dragged on for a while because there's some very complicated issues involved. You have some legislators who are afraid of subplanting the elected government of Puerto Rico with the federal control board. You have others who are wary of doing anything that might be described as a bail-out using US tax-payer dollars. It's a very difficult complex issue. We still believe Congress will do something. If the federal government doesn't do anything, there's a very elevated chance of lawsuits that spiral out of control.
We certainly expect all of our rated securities issued by Puerto Rico ultimately will default, whether it's July one or some date before that. Bond-holders of all sorts will suffer varying degrees of loss. The question is, by the time we get to that date, which is certainly a big one with about two billion of principal and interest due, whether there's some sort of framework for restructuring in place by that time. Obviously, if there's no framework in place and the commonwealth's financial situation remains unsettled, that's economically very negative overall although it's hard to predict with specificity what the impact would be on something like GDP.
If you have a lot of questions over-hanging the commonwealth's government and its liquidity position and all that and litigation, obviously, that's a big disincentive to employers and also to consumers. We've seen a steady flow of people leaving the island. I think a big part of that backdrop has been the uncertainty about the government's finances which matters a great deal, particularly in view of the very important role that Puerto Rico's government plays as an employer on the commonwealth.