SAN JUAN (Reuters) - Puerto Rico’s governor Alejandro Garcia Padilla will wield plenty of power next year despite his lame-duck status, but creditors will meet any heightened aggression with pugnacity of their own as Puerto Rico’s debt crisis approaches fever pitch.
Garcia Padilla on Monday announced plans not to seek re-election in 2016. The governor and creditors both seem prepared to dig their heels in even deeper on competing agendas for how to address the U.S. commonwealth’s $72 billion debt hole.
Garcia Padilla may take a more aggressive tack on trying to cram down cuts on repayments to bondholders, but some creditors say they could take the offensive, and demand Garcia Padilla use his newfound freedom to reform government.
“I wouldn’t see him as a lame duck,” said one creditor-side source. “He’s going to have actual legal power through the time when the brick wall” of debt hits the island.
Garcia Padilla, who had been facing dismal poll numbers, a federal corruption probe involving people tied to his administration and evaporating support within his own Popular Democratic Party (PPD), gave creditors a glimpse of what they may be facing in the months ahead.
The island owes nearly $1 billion in debt payments on January 1, 2016. “We will default in January or in May,” Garcia Padilla said on Wednesday, during an address at the National Press Club in Washington, D.C. “There’s no money.” [nL1N145248]
With a year left in his term, Garcia Padilla will still be in the governor’s mansion in May, when another $423 million in Government Development Bank notes come due, according to a source familiar with the matter.
The island needs a restructuring with creditors by then, or else faces a government shut-down, all on Padilla’s watch. Among his top priorities will be to lobby federal lawmakers for legislative help, including giving Puerto Rico access to bankruptcy protection.
Earlier on Wednesday, U.S. House of Representatives Speaker Paul Ryan said he has instructed committees to work with Puerto Rico’s government to come up with a “responsible solution” to the island’s financial problems. Meanwhile, Democrats in Congress have been pushing for Puerto Rico to be allowed access to U.S. bankruptcy laws to help solve its fiscal crisis. [L1N14538H]
Creditors will likely stay aggressive as well. If Garcia Padilla does not present any plans to creditors in a reasonable way, they would “point out the deficiencies and, given he has a limited period of time, then naturally the conversation degenerates,” said another creditor source.
Garcia Padilla’s stated reason for forgoing reelection was to focus solely on addressing the economic crossroads in Puerto Rico, which faces massive debt, a shrinking population and a 45 percent poverty rate.
His former secretary of state, David Bernier, announced earlier on Wednesday that he would run as a PPD candidate. Candidates from the rival New Progressive Party include Ricky Rossello, the son of a popular ex-governor, and Pedro Pierluisi, Puerto Rico’s representative in Congress.
With or without bankruptcy, coaxing concessions from bondholders is a big piece of Garcia Padilla’s strategy to right Puerto Rico’s ship. And both sides of the bargaining table seem prepared to dig their heels in, rather than compromise.
Some creditor sources said bondholders have a chance to demand that Garcia Padilla abandon the populist, labor-friendly platform that got him elected, and tackle issues like right-sizing government and raising electricity rates on customers of the island’s power utility, PREPA, which owes more than $8 billion of Puerto Rico’s debt load.
Yet the governor seems more likely to push harder than ever for repayment cuts to creditors.
He was less diplomatic on Wednesday than in the past towards creditors who lobbied against bankruptcy protection for Puerto Rico. “I hope Congressmen remember their faces” when the island falls into humanitarian crisis, he said.
Responding to ongoing pressure from creditors and Congressmen to provide more transparent financial statements, Garcia Padilla said, “that’s an excuse not to act ... they have the numbers. They know the truth.”
The governor added that debt restructuring is “inevitable and the financial market knows that.”
Some creditors do not expect negotiations to change much due to Garcia Padilla’s candidacy decision, saying they have been contentious all along.
The island has already proposed a universal debt exchange, or “superbond,” in which holders of various debt classes could participate, and creditors are still warming to the idea. Some have threatened litigation if their bonds are impaired.
When asked how his lame-duck status might effect negotiations, Garcia Padilla on Wednesday responded sardonically that creditors “have no one to bet against.”
“Sorry, guys,” he said.
Where Garcia Padilla’s decision could hurt him is in legislation that may be needed to effectuate deals reached between the island and its creditors.
Even before announcing he would not run, Garcia Padilla faced eroding support within his own party, including on legislative measures to address the island’s debt crisis.
Now a lame duck, the governor might face even more push-back, particularly from vulnerable PPD lawmakers trying to distance themselves from the unpopular governor.
“They will be freer to oppose him now,” and “political salvation may rely on moving away from him,” said Carlos Colon de Armas, an economist and finance professor at the University of Puerto Rico.
One currently pending bill would effectuate a restructuring reached in September between PREPA and creditors, creating a line item on customer invoices to generate revenues for the bonds.
Representative Luis Vega Ramos is among fellow PPD legislators who have voiced concern with the bill, and who have opposed the governor on other key proposals.
But Vega Ramos said he would not be less likely to oppose the governor’s agenda simply because of his candidacy decision.
In fact, he said, Garcia Padilla could increase his influence with lawmakers on the perception that he has “pushed away from partisan politics.”
His proposals “might be received as not being politically charged,” Vega Ramos said.
Additional reporting by Megan Davies; Editing by Diane Craft