Puerto Rico Scrambles for Funds To Pay the Unpayable

December 29, 2015

As the deadline for Puerto Rico's $1 billion debt payment approaches—they have until midnight Jan. 4 to pay, as Jan. 1 is a bank holiday—the island government is desperately scrambling to come up with funds to pay something.

On Dec. 1, Governor Alejandro García Padilla activated what is known as the clawback clause, allowing the government to commandeer funds from other indebted government agencies, to put into its own coffers for "repurposing," as the Governor put it. This is exactly what happened in Greece when it was attempting to come up with debt payments to the IMF.

García said that funds obtained in this way would be used to cover unspecified "essential services," as well as debt payments. Payment of General Obligation (GO) bonds are a priority, as these carry a constitutional guarantee of repayment. The Highway Authority and the Infrastructure Financing Authority, two agencies affected by the clawback policy, say they will dig into "reserve" funds to meet their interest payments; but what happens on Jan. 4 is anybody's guess.

These are desperate financial gymnastics, trying to squeeze out something to pay the unpayable—as Greece did, at the expense of its population. A case in point is the scheme for a "superbond," which according to Melba Acosta, head of the Government Development Bank (BGF), will be proposed to bondholders before Dec. 31. A mid-October article in the Wall Street Journal reports this is a plan by which the U.S. Treasury or a designated third party would manage an account holding a portion of Puerto Rico's dwindling tax revenues—effectively seizing them—and then using them to pay holders of the superbond, those bondholders who would presumably be willing to take some kind of haircut. This is nothing more than a fascist financial control board, similar to the Big MAC scheme which imposed brutal austerity on New York City in the 1970s. The impoverished Puerto Rican population would bear the cost.