Puerto Rican officials warned Monday the island's default on a $422 million bond payment is only the beginning if the U.S. Congress doesn't help resolve the situation soon.
The U.S. island territory did not make nearly $370 million of the payment that was due, the third and largest since 2015. Gov. Alejandro Garcia Padilla said a much more significant default could occur July 1 if Congress doesn't restore the government's ability to restructure debt under Chapter 9.
Garcia blamed lobbyists for hedge funds, which he blasted as "vultures," for the fact that Congress left on its recess last week with a restructuring bill stalled in committee.
"Our worst enemy at the moment is politics," he told reporters at a news conference.
The government on Sunday ordered a suspension of payments on debt owed by the island's Government Development Bank, a default that will likely prompt lawsuits from creditors and could be a prelude to a deadline to a much larger payment due July 1.
The governor said Puerto Rico can't pay the bonds without cutting essential services.
Island officials spent the weekend trying to negotiate a settlement that would have avoided the default but apparently came up short. The development comes as Congress has so far been unable to pass a debt restructuring bill for Puerto Rico.
"Let me be very clear, this was a painful decision," Garcia said in a speech Sunday. "We would have preferred to have had a legal framework to restructure our debts in an orderly manner."
Experts say Monday's default itself is unlikely to have a major effect on the broader bond market. Most bond funds have already sold their Puerto Rican debt, though a few still hold parts of the commonwealth's debts and could be hurt.
Puerto Rico's Government Development Bank had $422 million in payments due Monday. Puerto Rico will pay $22 million interest and it reached a deal with island credit unions on Friday to restructure about $30 million, leaving it short $370 million.
The administration also will be paying about $50 million in other debt payments due Monday owed by various other territorial agencies.
Nearly all the bonds are held by a variety of U.S. hedge funds and mutual funds.
Garcia said Puerto Rico's government could not make the payment without sacrificing basic necessities for the island's 3.5 million residents, including keeping schools and public hospitals open.
"We will continue working to try to reach a consensual solution with our creditors," he said. "That is one of our commitments. But what we will never do is put the lives and safety of our people in danger."
The governor had been warning since last year that the island's overall public debt of more than $70 billion is unpayable.
Puerto Rico has been suffering through more than a decade of economic decline since Congress phased out tax cuts that had made the island a center for pharmaceutical and medical equipment manufacturing. Garcia's predecessors and the island legislature borrowed heavily to cover over budget deficits, causing a debt spiral that has already prompted several smaller defaults.
Creditors have accused the government of exaggerating the crisis to avoid upcoming payments of nearly $2 billion due July 1 that includes general obligation bonds, which are guaranteed by the constitution. "At the moment, we don't anticipate having the money," he warned Monday.
Economists have warned that a default of this magnitude could cause Puerto Rico to lose access to capital markets and make the situation worse as the government faces the much larger payment due July 1.
Garcia lashed out at Congress for failing to pass a bill that would create a control board to help manage the island's $70 billion debt and to oversee some debt restructuring. He said it has been held up by "internal partisan and ideological divisions" in the House of Representatives.
"We can't wait longer," he said. "We need this restructuring mechanism now."