(Bloomberg) -- With two days left in Puerto Rico’s fiscal year, the cash-strapped commonwealth is struggling to pass a budget that would allow it to make payments on a $72 billion debt load that the island’s governor said is unsustainable.

Governor Alejandro Garcia Padilla said investors should be prepared to sacrifice if they want the island’s economy to grow, the New York Times reported, citing an interview last week.

“The debt is not payable,” the governor told the Times. “There is no other option.”

Some Puerto Rican bonds are trading near record lows as the island of 3.5 million people grapples with a jobless rate double the national average and a debt load bigger than every U.S. state except California and New York. The governor’s remarks land in a jittery global debt market, as investors weigh the possibility of a Greek default and exit from the euro zone.

The governor and his chief of staff were unable to comment, Jesus Manuel Ortiz, a spokesman in San Juan for Garcia Padilla, said in a text message. Betsy Nazario at the Government Development Bank, which handles the island’s debt transactions and lends to the commonwealth and its agencies, didn’t immediately respond to an e-mail, text and phone message.

The governor plans a televised address Monday at 5 p.m. local time after meeting with lawmakers, according to newspaper El Nuevo Dia.


The U.S. territory’s House of Representatives and Senate last week passed differing budget bills for the fiscal year starting July 1, with negotiations between the two chambers continuing. Under the proposals, about 15% of the $9.8 billion budget would go to debt service. Both plans cut spending by more than $600 million.

“He ran out of options,” said Robert Donahue, managing director at Municipal Market Analytics Inc., a Concord, Massachusetts-based research firm. “Further borrowing would have only compounded unsustainable debt and worsened economic deterioration.”

Puerto Rico’s cash crunch is intensifying. The GDB had $778 million of net liquidity as of May 31, down from $2 billion in October. Officials last week were considering offering to exchange GDB bonds due in the next three years for new debt with longer maturities, according to a person with direct knowledge of the discussions.


A group of former International Monetary Fund officials, in a report commissioned by the island, recommend that approach broadly across Puerto Rico debt.

Puerto Rico should voluntarily exchange old bonds for new bonds with later maturities and lower debt payments, Anne O. Krueger, Ranjit Teja and Andrew Wolfe wrote in the report, which is dated June 29.

“There is no U.S. precedent for anything of this scale and scope, and there is the added complication of extensive pledging of specific revenue streams to specific debts,” they wrote. “But difficult or not, the projections are clear that the issue can no longer be avoided.”

The U.S. Congress should allow Puerto Rico entities to file for Chapter 9 bankruptcy protection, and an independent fiscal- oversight board could help improve the island’s finances, the authors wrote.

As lawmakers debate the budget for the fiscal year beginning July 1, the island’s main electricity provider is also hitting a wall. The utility, known as Prepa, has a July 1 bond payment that it may not make, and is negotiating with creditors over restructuring its $9 billion of debt. Creditors say the power provider has the money for the payment.

Puerto Rico’s newest general obligation bonds, sold in March 2014, are trading near record lows. Hedge funds bought the majority of the debt at issue.

Tax-exempt general obligations maturing in July 2035 traded Friday at an average of about 77.3 cents on the dollar, close to the lowest since they were issued at 93 cents, according to data compiled by Bloomberg. The debt yields about 10.8%.

About half of U.S. municipal mutual funds hold debt from Puerto Rico, which is tax-exempt nationwide.

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