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S&P downgrades Puerto Rico debt to junk status
S&P downgrades Puerto Rico debt, says it would have been worse without government reforms
By DANICA COTO
Associated Press
2014-02-05 06:22 AM

SAN JUAN, Puerto Rico (AP) -- The credit-rating agency Standard & Poor's downgraded Puerto Rico's debt to junk status Tuesday as the U.S. territory prepared to return to the bond market this month.

S&P cut its rating one notch to "BB+," which is one level below investment grade. The agency noted that the downgrade would have been more severe without reductions in the Puerto Rican government's budget deficits and an overhaul of crumbling public pension systems by Gov. Alejandro Garcia Padilla.

The announcement worried many in Puerto Rico, which has entered its eighth year in recession while struggling with $70 billion in public debt and a 15.4 percent unemployment rate, higher than any U.S. state.

Garcia and other top officials sought to assure Puerto Ricans and bondholders that they would continue to whittle down the debt and present a deficit-free budget next fiscal year.

"Decades of fiscal irresponsibility cannot be turned around in 12 months," Garcia said at a news conference. "But the truth is, we did everything we could to turn it around in 12 months. My administration is not to blame for this downgrade, but I will take responsibility to pull the island out of it."

He assured Puerto Ricans that the government will be operating as usual and that he will submit legislation on Wednesday to further reduce the deficit this year.

Puerto Rico's bonds are popular with U.S. investors because they are exempt from federal, state and local taxes, and investors have become increasingly concerned about its ability to repay its debt.

Treasury Secretary Melba Acosta said the government is disappointed in S&P's decision, but she stressed that the island has all the liquidity on hand necessary to deal with the fallout.

"This did not catch us by surprise," she said. "We were prepared."

David Chafey, chairman of Puerto Rico's Government Development Bank, said the government has adequate resources to pay $575 million in debt payments due in 90 days and an additional $375 million in six months.

The downgrade had been expected by many in the investment community since the three major credit agencies put Puerto Rico's debt on watch for a possible downgrade. As a result, bond trading levels already reflected a lower-rating than even the new BB+ grade from Standard & Poor's, said Alan Schankel, managing director of Janney Capital Markets in Philadelphia.

"With three rating agencies having the rating on watch for downgrade, I don't think anybody will be terribly surprised by the downgrade," Schankel said. "I'm sure there will be some negative price reaction in the near future, and specifically tomorrow, but I don't think it will be precipitous."

Puerto Rico's government has taken a number of steps in recent months to improve its fiscal health, most notably pushing through changes in the retirement systems for public-sector workers.

S&P acknowledged the progress when it announced the downgrade. "We view the reform as significant and could contribute to a sustainable path to fiscal stability," it said.

Economists say years of deficits under previous Puerto Rican administrations led to the majority of the government's outstanding $70 billion debt. Analysts now will be watching whether the economy starts to show signs of improvement in the coming weeks and whether there is investor appetite for the territory to return to the bond market.

___

Associated Press writers Josh Boak in Washington and Ben Fox in Miami contributed to this report.

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