White House: No Federal Bailout for Puerto Rico

The White House says it has no plans to bail out Puerto Rico from its debt crisis.

Puerto Rico's governor is warning the island can't pay its $73 billion public debt, raising serious concerns about Puerto Rico's economy.

But White House spokesman Josh Earnest says no one in the White House is considering a federal bailout.

Instead, he says the Obama administration will work with Puerto Rico to identify existing federal resources that can help. He says Treasury Department officials are also working with the island's government.

Earnest says the federal government's help will be similar to what it provided to Detroit.

The Obama administration declined to offer a bailout to Detroit during its financial crisis. Detroit declared bankruptcy in 2013 — the largest municipal bankruptcy in U.S. history.

Puerto Rico's governor, following a damning report by former IMF staffers about the U.S. Commonwealth's financial stability, is facing tough decisions on brutal reforms and a possible debt restructuring to relieve the island's $73 billion debt burden.

Governor Alejandro Garcia Padilla said on Monday that over the next week, leaders would host meetings and briefings and tell citizens the steps the Commonwealth is taking to address Puerto Rico's problems.

The island faces crunch time this week with a June 30 deadline to agree to a restructuring of its utility PREPA or agree to extend the deadline. A July 1 deadline also looms, for paying various bonds including its general obligation debt.

Citizens of the commonwealth could face tough measures such as fewer teachers, higher property taxes and suspension of the minimum wage, if Puerto Rico follows the report's recommendations of debt restructuring and austerity measures.

The report, made available late Sunday, said Puerto Rico's fiscal problems are much worse than assumed and that the island needs to restructure its debts because tax rises and spending cuts alone are not enough of a fix.

Bondholders, even those who own government debt generally regarded as sacrosanct, will have to take a hit under the report's recommendations.

"The (former IMF staffers') report for the first time acknowledges the true extent of the problem," said Padilla in a statement. "We must make difficult decisions to meet the challenges we now know are ahead, and I intend to do everything in my power to lead us through this time."

The governor will make a televised address to the nation today, after the authors of the report present their findings.

The report traces Puerto Rico's problems to a phase-out of tax preferences for manufacturers, a housing price bust and 2009 recession on the U.S. mainland along with rising oil prices. However, it also said the island has localized problems such as high labor and transport costs, outmigration and population loss, and restrictive business investment regulations.

Weak public finances allowed increasing debt levels while the island also made overly optimistic revenue projections and budget formulations, and lacked control on spending while issuing extensive tax credits.

U.S. GOVERNMENT INVOLVEMENT UNLIKELY

While Puerto Rico's crisis may seem like a version of Greece's debt crisis in the euro zone, the U.S. government seems unlikely to get involved despite months of talks between Puerto Rico and the U.S. Treasury about options to seek financial help, according to a source familiar with the situation on Friday.

Federal policy experts are monitoring the situation and sharing expertise with Puerto Rican officials, a U.S. Treasury official said on Friday, but this "should not be interpreted as any kind of federal intervention."

The prospect of a debt restructuring spooked investors and sent Puerto Rico's benchmark general obligation bonds that carry an 8 percent coupon and mature in 2035 down 8 percent.

"As long as there continues to be uncertainty, the volatility will certainly be there," said Joseph Rosenblum, director of municipal credit research at AllianceBernstein. "We're not even close yet to the end of the Puerto Rico story."

The report recommended a debt restructure via a voluntary exchange of existing bonds for new ones with a longer or lower debt service profile.

"Everything that touches Puerto Rico, the debt, the monolines (bond insurers), the banks, will all sell off pretty aggressively," said Daniel Hanson, analyst at Height Securities.

The New York Times on Sunday cited Padilla as saying the island's debts were not payable and that creditors would probably have to take significant concessions such as five-year payment deferrals.

"We have to negotiate the debt," Senate President Eduardo Bhatia said as legislative leaders announced they would approve the 2016 fiscal budget on Monday. "As part of this budget, we have the opportunity to let the people of Puerto Rico — and the rest of the world know — our will to start working with the adjustments we have to make to restructure Puerto Rico's debt."

Shares in monoline bond insurers with exposure to Puerto Rico's securities fell sharply.

Assured Guaranty shares fell 9.9 percent while MBIA Inc fell 13.9 percent. BTIG brokerage on Monday downgraded both to neutral from buy. Assured Guaranty said it insured over $6 billion in par value of Puerto Rico bonds as of the end of March. MBIA had exposure of $4.5 billion in par value as of the end of last year.