Puerto Rico Warns Of Government Shutdown Due To Liquidity Crisis

Two months ago Puerto Rico’s third largest bank, Doral, failed. The event cost U.S. taxpayers $750 million in the process. Doral Bank wasn’t alone in having a Non Performing Loan ratio bordering on 40% – troubled Greek banks had similar ratios, well above what experts would consider safe levels.

Less than 60 days after this event Puerto Rico is looking even more like Greece in a lot of ways. The U.S. territory faces a looming government shutdown due to “the absence of liquidity to operate.”. In short Puerto Rico’s central bank, the Government Development Bank (GDB), has run out of money.

The territory’s top finance officials have said the government will likely shut down in three months because of a looming liquidity crisis and warned of a catastrophic impact on the island’s economy.

In a letter to leading lawmakers, including Governor Alejandro Padilla, the government officials said a last minute financing deal that could salvage the government’s finances looked unlikely to succeed. It then warned of laying off government employees and reducing public services in an effort to conserve cash.

“A government shutdown is very probable in the next three months due to the absence of liquidity to operate,” the officials said. “The likelihood of completing a market transaction to finance the government’s operations and keep the government open is currently remote.” the letter read.

The letter was dated April 21 and was sent to the heads of Puerto Rico’s Senate and House in addition to the governor. It was signed by the government’s fiscal team, including the head of the Government Development Bank and the Treasury Secretary.

Puerto Rico, which has a total debt of more than $70 billion, is currently trying to raise $2.95 billion in financing. At the same time it is pushing through unpopular tax reforms such as a higher value-added tax and increasing a levy on crude oil.

The reason for the tax overhauls is for hedge funds (who own a large portion of the bonds from a $3.5 billion deal floated last year) to feel comfortable supporting the new bond issue. The letter from the GDB appears to be an effort to shock lawmakers into action before time runs out.

If the GDB’s timetable proves accurate we could see major financial collapse inside of 90 days.

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