Puerto Rico in Historic Financial Default

Puerto Rico has just done something that has not happened in 83 years.

The Caribbean island, which is deeply in debt, defaulted late Friday on debt supposed to be guaranteed by the commonwealth’s constitution.

Puerto Rico in other words was required to pay its creditors who are in possession of general obligation bonds prior to paying anyone else, including the police.

However, Alejandro Garcia Padilla the Governor of Puerto Rico decided not to. He argued paying emergency personnel, teachers and other needs deemed critical must be paid first.

The administration is continuing to take steps to make sure that Puerto Rican residents continue receiving services that are essential while the commonwealth faces a delicate situation financially, said a spokesperson for the government.

The island is not planning on making any of the payment for $800 million to bondholders due July 1. The government made the announcement late Friday saying its dire financial position had left it with only $350 million on hand in cash.

The default by Puerto Rico on Friday is the first time that a U.S. state or an entity that is state-like, as Puerto Rica is a territory of the U.S., has not paid its general obligation bonds since the 1933 Great Depression.

This default was not unexpected and therefore has not caused that much havoc in the broader bond market. The Caribbean island is more than $70 billion in debt, which equated to over $20,000 per resident of the island.

Puerto Rico has defaulted already on three occasions for other bonds and has been warning for a number of months that it would not have the cash to pay this particular debt.

Some dispute exists as to if Puerto Rico is actually out of cash. On Friday, the island released its financial statements for the year 2014 that have been long overdue.

Rescue legislation was put together by President Barack Obama and the U.S. Congress for Puerto Rico. The bipartisan compromise was meant to create order to the process in order to come to a compromise between the island and its bondholders to create a viable plan for repayment.

Last Thursday afternoon the bill was signed by Obama, and just hours later, Padilla issued his executive order saying the island would no longer make its general obligation payments, amongst other bond payments.

Defaults usually trigger a number of lawsuits, but the measure passed by Congress forbids the bondholders to sue the island for a number of months.

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