Puerto Rico Central Bank Governor Restricts Withdrawal To Avert Default in $423M Debt Repayment

By Staff Writer

Apr 12, 2016 08:02 AM EDT

Government Development Bank (GDB) of Puerto Rico has declared an emergency on Saturday suspending its lending power and freezing most withdrawals. Alejandro Garcia Padilla, governor of the island's central bank has announced the emergency measures aiming to avoid default on a crucial May 1 debt repayment schedule.

The executive order is expected to protect the bank's dwindling liquidity through allowing withdrawals only for the essential public services. However, the order doesn't indicate for a moratorium on the government bank principal or interest payments. The central bank is in talks with the creditors on the $423 million debt repayment schedule, reports Fox News Latino quoting its governor.

Puerto Rico has been facing total debt of around $70 billion and 45% of its population lives beneath the poverty line. Though the island has experienced default in small debt repayment earlier, but a default from GDB's part will pose more serious risks. GDB is now unable to make the debt repayment, according to a report published in Reuters.

Saturday's executive order appears following promulgation of a new law during last week entitling 'The Puerto Rico Emergency Moratorium and Financial Rehabilitation Act'. The law empowers the GDB governor with emergency powers including ability to declare a moratorium on all bond payments, reports CNBC.

GDB depositors such as municipalities and public agencies are barred from withdrawing their money with limited exceptions for the funds related to essential services. The governor's order also suspends minimum reserve requirements at GDB while preventing the bank from lending or making payments against GDB guaranteed debts.

Intriguingly, the GDB governor has declined to exercise his authority in declaring a moratorium on its own debt repayment schedule. Continuation of restructuring talks between GDB and its creditors has been cited as the reason behind his declining.

The executive order establishes reasonable and necessary procedures in preserving liquidity at GDB. It also enables GDB to continue operations for the benefit of the health, safety and welfare of the people, narrates a statement from the central bank governor.

Certain federal funds including payroll, funds for police, fire, medical and education as well as disaster recovery operations are allowed to withdraw under 'essential services' category. The order also calls for forming a committee comprising of top island officials in managing these disbursements.

However, Garcia Padilla's emergency legislation as well as the authority to issue a moratorium on any debt the governor deems necessary, has been criticized by some local bondholders. However, the new law may attract suits from the creditors, forecasts Daniel Hanson, an analyst at Height Securities in a note published this week. Rating agency Moody's has also warned in its note on Friday that it will define GDB's non-payment as a default regardless of moratorium law's provisions.

To avoid default status, Puerto Rico's central bank governor, empowered with the new law, has issued an executive order restricting withdrawal of funds. He may even consider for imposing moratorium on upcoming debt repayment, but this won't save GDB from gaining a default status attracting serious economic risks. In addition to the adopted measures to avert ominous default, the governor has been continuing discussions on repayment schedule with its creditors. 

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