Puerto Rico said Wednesday that it would default on part of $1 billion in bond payments due January 1, blasting "hedge and vulture fund" creditors for blocking the restructuring of the island's debt.
Alejandro Garcia Padilla, governor of the US island territory struggling with more than $70 billion in debt, said that it would miss about $37 million in payments to ensure the government has enough funding to pay salaries, pensions and other creditors.
Garcia Padilla said most of the $1 billion due by the government and about a dozen official agencies would be paid, including a key $335 million payment on bonds issued directly by the territory.
It also includes around $300 million that the Electric Power Authority owes but which is already covered in separate debt restructuring talks.
The missed payments would be on bonds with lesser repayment rights issued by the Public Finance Corporation and the Infrastructure Financing Authority.
In that way, Garcia Padilla said, Puerto Rico could avoid being called into general default by creditors and credit-rating agencies.
But he said that, in effect, the government has already moved into default because it had stopped making mandatory transfers of funds to trustees for coming debt payments, instead of using those funds for general government needs.
And he warned that Puerto Rico's ability to make future payments would be increasingly restricted, as it needed to reserve money for salaries and pensions, following sweeping spending cutbacks over the past year.
"My government now has the responsibility to protect all Puerto Ricans as much as possible," he said in a speech in Spanish in San Juan.
He also urged the US Congress to act on proposed legislation that would allow the Caribbean island of 3.5 million people to enter bankruptcy protection.
That would force all its creditors to join in restructuring its finances, possibly including writing off some of the huge debt burden.
Congress blocked the legislation earlier this month, which Garcia Padilla alleged was done under pressure from bondholders.
"We all know that creditors have spent a fortune on lobbying against Puerto Ricans in Congress," he said.
"Some politicians have been seduced by the arguments of the vulture funds."
The US Treasury Department added its voice in support of Garcia Padilla, calling on the Congress "to act now" on the bankruptcy legislation.
"Puerto Rico is at a dead end, shifting funds from one creditor to pay another and diverting money from already-depleted pension funds to pay both current bills and debt service," the Treasury said in a statement.
The Puerto Rican government ramped up debt, issued cheaply due to US tax rules, over the past decade in an effort to reverse a grinding economic contraction.
But those efforts have failed -- the economy continues to shrink -- and the government has been forced to slash spending in order to keep up debt payments.
But earlier this month Garcia Padilla said any more cutbacks would further damage the economy, which has already seen an exodus of more than 200,000 Puerto Ricans, mostly to the US mainland, over the past five years.