- POSTED: 08 Feb 2014 04:10
Moody's sliced Puerto Rico's debt rating two notches to junk level, saying economic growth was too weak to overcome the US territory's mounting debt problems.
WASHINGTON: Moody's sliced Puerto Rico's debt rating two notches to junk level on Friday, saying economic growth was too weak to overcome the US territory's mounting debt problems.
Three days after Standard & Poor's dealt Puerto Rico a downgrade, Moody's reduced the rating to Ba2, two steps into "speculative" or junk territory, from the previous low investment grade of Baa3.
"The problems that confront the commonwealth are many years in the making," Moody's said, citing chronic deficits, underfunded pensions, and seven years of recession, on top of the government's US$70 billion of debt.
Despite what it called "strong and aggressive" moves by the Caribbean island's government to stabilize its finances, "we do not see evidence of economic growth sufficient to reverse the commonwealth's negative financial trends," Moody's said.
In addition, it put the territory on a negative outlook - a warning that another downgrade could be forthcoming - as Puerto Rico faces deep challenges to obtain new commercial financing to manage through a liquidity squeeze in the near future.
The government has been seeking to raise US$2 billion in fresh financing in recent weeks.
The financial problems of the island, with a population of only 3.7 million, have shaken the large market for US municipal bonds, especially in the wake of the default last year by Detroit.
Enjoying broader tax breaks than most issuers in that market, Puerto Rico was able to issue huge amounts of debt over the past decade, meant to finance a buildup of infrastructure and revitalize the island's economy.
But the economy has continued to stumble, contracting every year since 2006 even as the US economy has rebounded in the past four years.
The official unemployment rate is 14.7 per cent, more than double that of the United States, and the debt burden is equivalent to 93 per cent of the island's gross domestic product, or economic output, more than the debt-to-GDP ratio of troubled Spain.
Following the S&P downgrade, on Wednesday Governor Alejandro Garcia Padilla announced new cutbacks, including reducing the fiscal deficit by US$170 million and slashing agency budgets by two per cent.
He also said the government would try to renegotiate short-term loans whose costs increased after the S&P downgrade.