Skip to comments.S&P downgrades Puerto Rico's credit to junk status
Posted on 02/05/2014 3:46:29 AM PST by cll
Standard & Poors cut Puerto Ricos credit rating by one notch on Tuesday, becoming the first of the Wall Street credit ratings agencies to downgrade the debt to junk level.
S&P lowered the commonwealth governments general obligation rating to BB+ from BBB-. At the same time, it downgraded commonwealth appropriation secured debt and Employee Retirement System (ERS)debt to BB. All of S&P ratings remain on CreditWatch with negative implications.
My administration isnt to blame for this. But it is my responsibility to get us out of it, Gov. Alejandro García Padilla said during a hastily convened press conference at La Fortaleza after the downgrade. Decades of fiscal irresponsibility cant be fixed in 12 months. We did everything we could.
The governor called for unity, saying that partisan politics should be set aside three years out from the next election. He urged more optimism than ever.
Its time to show what we are made of in Puerto Rico, he said.
García Padilla said it is premature to talk about cost-cutting steps.
Bracing for the downgrade, he has said layoffs of government workers are not on the table. He has not firmly shut the door to a dramatic hike in the sales & use tax or reducing the public sector work-week as the fallout from the downgrade is likely to set off a domino effect that ripples across the island economy.
The sun will come out tomorrow, García Padilla said. Nothing will change in the functioning of the island tomorrow.
The governor added that measures to be filed Wednesday to reduce the deficit for the current fiscal 2014. He has pledged to file a balanced budget for fiscal 2015.
The downgrades follow our evaluation of liquidity for the commonwealth, including what we believe is a reduced capacity to access liquidity from the Government Development Bank (GDB), S&P said.
In a related action, S&P downgraded the GDB to BB, and the rating remains on CreditWatch with negative implications.
GDB Chairman David Chafey said there is sufficient liquidity through the end of the fiscal year in June.
We also believe that the commonwealths access to liquidity either through GDB or other means will remain constrained in the medium term, even in the event of a potential issuance of debt planned next month. We believe that these liquidity constraints do not warrant an investment-grade rating, S&P said.
The negative CreditWatch reflects uncertainties relating to the commonwealths constrained access to the market, as well as S&Ps assessment of the size and timing of potential additional contingent liquidity needs.
The downgrade came as the Puerto Rico government planned a return to the capital markets this month not only to appease Wall Street credit-rating agencies, but also because it needs somewhere between $800 million and $2 billion to meet its obligations this fiscal year.
The government was considering whether to return to the traditional municipal-bond market to raise money through its top-rated credit, the Sales Tax Financing Authority (Cofina by its Spanish acronym), or tap external capital via a hedge-fund pool being pushed by large financial institutions such as Morgan Stanley and Barclays Bank.
Treasury Secretary Melba Acosta said Tuesday the government is working with banks to chart the best option to return to the capital markets.
We have financing options. It could be GOs, it could be Cofinas, she said.
Puerto Rico knows that it is facing higher than normal interest rates regardless of which we choose, Acosta added.
The Treasury chief said the financing talks are not limited to bond issues.
We have been negotiating with the banks before the downgrade and we will continue to do so, Acosta said.
S&P recognizes administration moves
This isnt fair, García Padilla said, arguing that his administration had addressed all of the issues flagged by the credit rating agencies in record time.
S&P said signaled that the one-notch downgrade could have been lower.
That the rating is not lower is due to the progress the current administration has made in reducing operating deficits, and what we view as recent success with reform of the public employee and teacher pension systems, which had been elusive in recent years, S&P said. We view the reform as significant and could contribute to a sustainable path to fiscal stability.
S&P said the García Padilla administrations recently announced intent to further reduce appropriations in fiscal 2014 by $170 million and budget for balanced operations in fiscal 2015 as potentially leading to credit improvement in the long run, but subject to near-term implementation risk that could lead to further liquidity pressure to the extent deficits continued.
We also note the sustained commitment through a range of financial and economic cycles to funding debt obligations and providing what we view as strong bondholder security provisions, S&P said.
Economist Joaquin Villamil said the downgrade was done in bad faith in light of the aggressive steps taken by the administration to shore up the governments finances and return to the capital markets this month.
Moodys Investor Service and Fitch Ratings still peg Puerto Ricos GOs one notch above junk, but both have warned that downgrades could be coming.
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In other words, García Padilla said, “Fortuño’s Fault !”
Well if that won’t make the Dems want them as the 51st state, nothing will.
The 90s "A BJ is not Sex" W.J. Clinton
The 10s "It's Bush's Fault, I heard about it when you did." B.H. Obama
I guess they are ready for Statehood now....
I am shocked another Latin country is having a debt crisis. But who am I as a gringo to talk when we have Illinois, etc. :)
Pretty soon we won’t have anywhere to run to because the rest of the United States are headed the same way!
Departure of the U.S. military from Puerto Rico got into high hear in 1999. Vieques Island was vacated by the USN in May 2003 and Roosevelt Roads NavSta closed in 2004. Puerto Rico's military value has become very questionable, so that argument no longer applies.
I have long believed that the United States should give the Commonwealth of Puerto Rico full independence.
Puerto Rico is in a very good geographic position to be an economic powerhouse. Unfortunately the Latino culture of political greed and corruption stymies that.