Puerto Rico governor declares emergency at Government Development Bank

Puerto Rico's Governor Alejandro Garcia Padilla addresses the audience at the capitol building in San Juan, in this February 29, 2016 file photo. REUTERS/ALVIN BAEZ/FILES

Puerto Rico's Governor Alejandro Garcia Padilla declared an emergency at the island's Government Development Bank on Saturday as the GDB struggled to avoid default on a crucial May 1 debt payment.  

    The announcement followed his signing of a law this week authorizing him to take steps to avoid receivership at the GDB, the U.S. territory's primary fiscal agent, and prevent a run on the bank. 

   The emergency declaration "establishes reasonable and necessary procedures to preserve GDB's liquidity," Garcia Padilla said in a statement on Saturday in Spanish. 

    However, he declined to exercise his authority to declare a moratorium on GDB's $422 million May 1 debt payment, citing continuing restructuring talks between GDB and its creditors.

     "The Executive Order establishes reasonable and necessary procedures to preserve liquidity at GDB and allow it to continue its operations for the benefit of the health, safety and welfare of the people," he said in the statement. 

    Puerto Rico faces $70 billion in total debt, a 45 percent poverty rate and a shrinking population.

   Garcia Padilla has said the GDB cannot afford the looming payment. While the island has defaulted on small debt payments in the past, a default at GDB would be the most serious yet.

    Local efforts by GDB and other Puerto Rican debt issuers to reach a debt restructuring parallel plans in the U.S. Congress to draft legislation aimed at solving the island's economic crisis, possibly by allowing it to restructure debt and putting its finances under federal oversight.

A new draft of that legislation is expected next week from the House Natural Resources Committee. 

    Some Puerto Rico bondholders have criticized Garcia Padilla's emergency legislation, particularly the authority to issue a moratorium on any debt the governor deems necessary.

Daniel Hanson, an analyst at Height Securities, said in a note this week the law could draw lawsuits from creditors. 

    Moody's said in a note on Friday that it would define a nonpayment at GDB as a default "regardless of [a debt] moratorium law's provisions."  

(Reporting By Nick Brown in San Juan; Editing by Daniel Bases and Tom Heneghan)

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