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Puerto Rico Government Threatens Shutdown

Puerto Rico’s Government Development Bank released an open letter to lawmakers, warning them that the government was likely to shut down completely in the coming three months, resulting in massive layoffs and a suspension of critical services, because a vital financing deal does not look likely to go through. Saddled with $73 billion in debt and amid a broad bond selloff, the government is trying to raise $2.95 billion by mid-May. AP:

Bank officials said the government needs to approve a five-year plan to help reduce a $73 billion public debt as well as approve sweeping changes to the island’s troubled tax system.

Once the government does that and presents a balanced budget, then it can be in a better position to issue bonds, said David Chafey, president of the bank’s board of directors.

“Time is passing, and it’s passing quickly,” he told The Associated Press. “We need to provide investors with some kind of comfort.”

Economist Charles Blitzer, a former World Bank and IMF official, said he wasn’t surprised by the bank’s assessment, adding that U.S. investors overall have known that liquidity is very low.

“What’s a surprise is typically one agency of the government doesn’t write to the rest of the government in quite this way,” he said in a phone interview.

The majority of the upcoming offering would go to hedge funds, who are insisting on an increase in Puerto Rico’s value-added tax, as well as a levy on petroleum products, as a condition for the extra financing. The measures are facing opposition from lawmakers in Governor Alejandro Garcia Padilla’s own party. Padilla has been pushing for raising the VAT to 16%, but a 14% compromise bill is likely to pass Puerto Rico’s House soon. It is not clear from reports how it might fare in the Senate.

This is but the latest turn in the long-running drama of Puerto Rico’s decline. With an underfunded pension system, municipal utilities that are likely to default this year, and no means of resolving its mess due to lack of bankruptcy procedures, Puerto Rico is a ticking time bomb in the Caribbean.

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