The president of the Government Development Bank, Melba Acosta Febo, issued a statement rejecting the proposal Tuesday evening. She called it “exactly the type of ‘Wall Street’ solution that led us to the precipice we are now looking over,” because she said it would add debt and raise costs over the long term. Others with financial dealings in Puerto Rico said they were caught off guard and did not know how to respond. Some said they thought the legislation was intended not so much to trip up creditors or elicit offers as to pressure Washington to speed up its work on the federal rescue package. Some said they continued to hope on Tuesday that Puerto Rico’s House might enact a narrower moratorium than its Senate had, perhaps excluding certain types of debt or agreeing to pay interest but not principal. But as the hours passed, their hopes were waning. For months Puerto Rico and its Government Development Bank have been meeting with the holders of the island’s $72 billion in debt, trying to interest some of them in a consensual debt restructuring. Parties to some of these discussions, who spoke on the condition of anonymity because the talks are private, said they became aware late last week that the development bank’s assets were being hastily transferred to other financial institutions, for reasons that were not explained. Rumors then began to fly on the island that the bank was about to be shut or privatized. A confidential regulatory review of the development bank last November found that it was insolvent and would have a $1.3 billion deficit by the end of June, which raised the prospect of dedicated funds being diverted to other purposes. The confidential review’s findings were cited by a federal judge’s ruling in a tax case in March, throwing the bank into a crisis just weeks ahead of a scheduled $422 million debt payment, due on May 1. The Senate bill on Tuesday said the bank had only $562 million in cash left. The turmoil at the bank threatened to spread quickly to other parts of Puerto Rico’s economy, which is already deeply distressed. Much larger debt payments, totaling about $2 billion, are due from other branches of the government on July 1.
The financial crisis in Puerto Rico is escalating fast; the island has taken a sudden step to declare a state of emergency and move toward a unilateral moratorium on all government debt payments, thereby rejecting efforts by the US to allow it to restructure only under close federal supervision. This has taken both Wall Street and Washington by surprise, however, despite the move by Puerto Rico, the House Natural Resources Committee still intends to update its draft plan to rescue the US territory. This follows a move by creditors of Puerto Rico's Government Development Bank (GDB) to sue in a bid to prevent it from distributing money to creditors in what they call "preferential transfers" ahead of the GDB's 1 May debt payment that Puerto Rico's Governor says may not be payable. In an interview with Bloomberg News last week, Rossello said he would consider any proposal for restructuring his island's debt, but added that such proposals should include measures to ensure that bondholders are paid first.