Puerto Rico unveils plan to cut debt

SAN JUAN, Puerto Rico – Puerto Rico is bracing for widespread spending cuts after the government released a long-awaited fiscal reform plan on Wednesday that would reduce much of the island’s $72 billion public debt and calls for restructuring the remainder at the expense of bondholders.

The five-year plan proposes that the government cut subsidies to municipalities and the University of Puerto Rico, offer early retirement and reorganize or merge state agencies. It also calls on the government to extend until 2021 legislation that would freeze new hires, salary increases and collective bargaining agreements.

Gov. Alejandro Garcia Padilla acknowledged in a televised address that Puerto Ricans already have had to endure new taxes, an increase in utility bills and layoffs during a nearly decadelong economic stagnation.

During a background briefing late Tuesday, members of the group that worked on the plan said Puerto Rico’s Government Development Bank would run out of money by the end of this year if action is not taken and warned that the government would face a liquidity crunch next year if the plan is not implemented.

The U.S. Treasury said it was reviewing the plan and noted that Puerto Rico still needs an orderly process to address its liabilities.

It is unclear how creditors and bondholders will react to the plan, which addresses only $47 billion of the island’s public debt and still requires approval by Puerto Rico’s Legislature and governor. Garcia has said the $72 billion public debt is unpayable and needs restructuring.

Even if the plan is implemented, officials warned the government would still face a $14 billion financing gap from 2016 to 2020, and that it would not be able to meet debt payments as scheduled because it could affect essential services. Officials warned that a compromise with creditors is needed to avoid what they called a disorderly default and legal morass.