PUERTO RICO'S FINANCIAL CRISIS CAUSES GOVERNMENT
SHUTDOWN
For now, debt service payments by Puerto Rico's governmental agencies
are not at risk, even though the Commonwealth faces a shutdown of
governmental services. An estimated 100,000 employees are out of
work, while the Governor and legislature wrestle over the best solution
for a chronic budget shortfall. The Island's government has not
been able to agree on a budget since 2004. This has necessitated
continuous borrowing from the Government Development Bank. Because
of the political deadlock, Puerto Rico faces a $740 million deficit
for the current fiscal year. The Development Bank has demanded the
imposition of an Island wide sales tax of 5.9% before it extends
a $532 million line of credit to allow continued government operations.
Monies designated for debt service are segregated from governmental
revenues before they can be used for spending purposes, providing
insulation from the on-going budget conflict. Standard & Poor's
has put the Commonwealth's "BBB" general obligation bond
rating on CreditWatch-Negative, and has warned it may downgrade
the rating if a budgetary compromise is not reached. Moody's has
done the same. Because of the strong protection given to debt service
funds, neither rating agency sees a short term impact on the Commonwealth's
ability to meet its debt obligations. However, should the current
crisis continue, preventing the Island from accessing a loan from
the Development Bank, debt service pressures could increase.
Standard & Poor's expects the crisis to be short-lived. Already,
the Governor and Senate leaders have acquiesced to the Development
Bank's 5.9% sales tax demand. It remains to be seen whether other
branches of the government, particularly the Commonwealth's House
of Representatives are willing to compromise as well. Although Puerto
Rico's finances are chronically out of balance, this latest crisis
has been exacerbated by overarching political differences between
the Governor and legislature, who represent different political
parties.
5/4/06
About Dr. Abrams
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