PUERTO RICO’S default on a debt payment for the first time will leave the island closed out of the U.S. financial markets, deepening what is already a serious economic crisis.

    Governor Alejandro Garcia Padilla paid out just US$628,000 of US$58 million in Puerto Rico Public Financing Corp. (PFC) debt that came due Saturday, pleading a lack of liquidity in the recession-wracked U.S. commonwealth.

    The default impacts mainly Puerto Rican creditors, in particular the island’s savings and loans. But some bonds were sold in the U.S. market, and the government’s failure to meet the debt payment is certain to impact its ability to raise funds in future, analysts say.

    “It closes the door to financing for the government and its corporations in the (U.S.) market,” said Jose Joaquin Villamil, an analyst with Estudios Tecnicos in San Juan.

    This month’s missed payment is just the tip of a US$72 billion mountain of debt that Garcia Padilla has declared to be “unpayable.”

    Debt ratings agencies had already downgraded Puerto Rico bonds to junk status, so what was already a difficult borrowing environment has just been made much worse.

    Garcia Padilla, who is negotiating with creditors, is expected to present a restructuring plan by the end of the month.

    The aim, he has said, is to rescue Puerto Rico from a “vicious cycle of contraction, emigration, austerity and taxes.”

    Victor Suarez, the governor’s chief of staff, explained that the government defaulted on the PFC bonds because it needed to give priority to holders of government bonds, known as GOS, who are owed more than US$100 million.

    Meanwhile, the crisis is making life more difficult for the island’s 3.5 million people. At 12.4 percent, unemployment is more than double that in the United States, and a massive out-migration is underway, eating away at Puerto Rico’s tax base.

    The situation has been years in the making. The commonwealth’s finances were dealt a crippling blow in 2006 with the loss of federal tax breaks for U.S. companies with operations on the island.

    It has been in and out of recession in the eight years since. As economic activity shrank, the government papered over budget shortfalls with fresh borrowing.

    (SD-Agencies)