Washington sending economic advisers to Puerto Rico

Reuters News
Posted: Nov 21, 2013 5:17 PM

SAN JUAN (Reuters) - The Obama administration is dispatching a team of experts to Puerto Rico to advise the Caribbean island's government on its hard-pressed finances and to help it better tap federal funding programs, according to officials.

The move is not, however, a first step toward a full federal bailout of the U.S. commonwealth, local officials said, aiming to shoot down bond market speculation that the cash-strapped local government cannot dig out of its fiscal morass on its own.

Puerto Rico, with an economy in or near recession for the last eight years, has chronic budget shortfalls and has spawned worry among investors in the $3.7 trillion municipal debt market, where its bond prices have plunged this year.

As a result, it pays by far the highest interest rates of any major muni bond issuer. The yield on its 10-year general obligation bonds is currently around 8.80 percent, roughly 6.20 percentage points above high-rated munis of similar maturities.

With a $70 billion debt load and a substantially underfunded government pension system, the island has fueled market speculation it may need a bailout from Washington.

But local and federal officials dismissed talk of a U.S. takeover of Puerto Rico's finances and say the team of as many as 10 advisers due in San Juan next month was recommended in 2011 by a long-established task force.

"There is no federal take over of Puerto Rico," the administration's chief of staff, Ingrid Vilá, said.

Most of the group's work will focus on improving Puerto Rico's management of federal funds to ensure officials are getting the amounts they are entitled to and putting them to effective use, according to the officials.

"There is less here than some people think," said Jeffrey Farrow, who served as the Clinton White House's liaison on Puerto Rican affairs. "This is pretty straightforward and an extension of what they have been doing in the past, but more intense, formalized and public."

The first team of officials was scheduled to be from the Environmental Protection Agency and the Health, Education and Housing and Urban Development departments, officials said.

Puerto Rico's education, health and housing departments are among of the biggest recipients of federal funding and have also been responsible for past Puerto Rico budget shortfalls.

The EPA's intervention may stem from concerns regarding the ability of the Puerto Rico Electric Power Authority to comply with new federal air quality regulations that take effect in 2015.

Puerto Rico's economy has been steadily contracting since last October, shrinking by 5.4 percent in August, according to the Government Development Bank Economic Activity Index.

(Reporting by a Reuters Correspondent in San Juan; Additional reporting and writing by Michael Connor in Miami; Editing by Dan Grebler)