Puerto Rico expects U.S. economic incentives -Bhatia

Reuters

By Edward Krudy

NEW YORK, Oct 7 (Reuters) - Federal officials are expectedto announce incentives to boost Puerto Rico's economy in thenext few months, a top legislator from the commonwealth said onMonday, responding to investor concerns about the island'srising debt costs and bleak growth.

The help is unlikely to include direct financial aid, PuertoRico Senate President Eduardo Bhatia said at an investor gathering in New York. He did not provide specifics.

The assistance would come in response to the last four yearsof recession in the Caribbean territory, Bhatia said. It hasbeen given added urgency due to a spike in Puerto Rico's debtyields in the recent months, he said.

The selloff in Puerto Rico's bonds has been driven byworries about the territory's shrinking economy, its highjobless rate and per capita debt, which are far higher than thatof any U.S. state. The U.S. commonwealth's unemployment rate isnearly 14 percent, higher than any U.S. state.

"We are waiting to hear an announcement from the Treasuryand the White House. We know for a fact they have been veryaggressively thinking of how to be sure that they can helpPuerto Rico send a very strong signal of stability right now,"Bhatia told the meeting.

Puerto Rico has about $70 billion of outstanding debt, ornearly 2 percent of the overall $3.7 trillion municipal bondmarket. That dwarfs the $18 billion held by Detroit, whichroiled the muni market when it filed for municipal bankruptcyearlier this year.

Puerto Rico's debt is held widely by mutual funds,increasing the systemic risk. The island will not be entitled toChapter 9 municipal bankruptcy.

Puerto Rico's debt costs have soared this year. In May,30-year general obligation bonds carried a yield of about 5.3percent and hit a peak of 8.6 percent in mid-September. Thedebt is now trading with a yield of 8.1 percent, which is farhigher than any U.S. state's. Puerto Rico's debt is rated BBB,one notch above junk.

ECONOMIC REFORMS

Officials in San Juan have embarked on economic reformsintended to show that the Caribbean territory will pay itsdebts, Bhatia said, citing pension reform, changes to tax lawsand a reduced government work force.

Bhatia expressed frustration that investors appeared not tohave recognized the reforms, and instead are punishing PuertoRico with higher borrowing costs.

"The kind of reform you are making us do is very tough,"Bhatia said. "But we are doing it because we want to send asignal that we are honoring our debt."

Bhatia said even if Puerto Rico were in danger ofdefaulting, the commonwealth's constitution stipulates that bondholders are paid before pensioners and government workers. Hecited the 2006 crisis in which Puerto Rico's bond holders werepaid while government workers were not.

Economic development officials and Puerto Rico GovernorGarcia Padilla have been in talks with the U.S. Treasury andWhite House, he said.

A Treasury spokesperson told Reuters on Monday that theTreasury was monitoring the situation but would not discusswhere the monitoring would lead.

"Given the potential for Puerto Rico's financial challengesto impact United States markets, including the municipal market,Treasury continues to closely monitor developments," said thespokesperson, who did not want to be named.

A senior White House administration official said PresidentBarack Obama's task force on Puerto Rico has been "working for anumber of years to maximize the impact of federal resources onthe island.

"As part of its ongoing work, the task force is coordinatingwith federal agencies to strengthen Puerto Rico's fiscalsituation and economic outlook," the official said.

Although details about any federal action were thin,analysts at Bank of America Merrill Lynch pointed to a $320million aid package the Obama administration agreed to forDetroit to help with infrastructure development. In the case ofDetroit, a large portion of the aid, which comes from federal,state and private sources, was previously earmarked for the citybut delivery was slowed by red tape and other issues.

As one economic development tool, Bhatia noted tax breaksthat some U.S. companies once enjoyed in Puerto Rico.

Federal authorities phased out tax breaks for parentcompanies of Puerto Rico-based U.S. manufacturers at the end of2006. Puerto Rico entered a recession that year and has yet torecover.

There have been some positive signs from Puerto Rico'seconomy. Tax revenues for the three months through Septemberrose by $70 million, or 4.4 percent, to a provisional $1.68billion, the island's treasury secretary said on Monday. Bhatiaattributed the gain to recent tax reform.

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