Puerto Rico asks Washington for federal aid

Puerto Rico asks Washington for federal aid
By Tom Braithwaite in Washington
Copyright The Financial Times Limited 2009
Published: September 28 2009 23:03 | Last updated: September 28 2009 23:03
http://www.ft.com/cms/s/0/7a9eab28-ac77-11de-a754-00144feabdc0.html


Puerto Rico has appealed to the Obama administration for federal assistance as it battles a $3.2bn budget deficit, a three-year recession and the worst credit rating of any state or territory in the US.

Luis Fortuño, governor of the territory, met Lawrence Summers, chief economic adviser to President Barack Obama, and Treasury officials last week. He told the Financial Times the administration had been “shocked” at the state of Puerto Rico’s finances.

The US Treasury and a spokesman for Mr Summers both confirmed they had met Mr Fortuño last week. They declined to comment on the detail of the talks.

While California’s much bigger nominal debt has worried creditors and the federal government, Puerto Rico’s deficit for 2009 of $3.2bn (€2.2bn, £2bn) ranked the highest as a percentage of the general fund, at 29 per cent.

Mr Fortuño, a Republican who took office in January, also visited credit rating agencies in New York during his trip to the US mainland as part of an effort to preserve his territory’s investment grade status. Moody’s and Standard & Poor’s rank Puerto Rico’s debt just one notch above “junk”, although the outlook is “stable”.

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Carlos Garcia, president of the Government Development Bank of Puerto Rico, warned of devastating consequences if the investment grade were lost.

“We modelled what that would mean and we were talking about unemployment going to 25 per cent,” he said.

Like other territories and states, Puerto Rico is receiving federal stimulus money but Mr Fortuño is also requesting help shoring up the banking sector and reforming a local Medicaid programme that covers 1.5m of the territory’s 4m population and costs more than $1bn.

“We need assistance from the federal government to ensure that we have a strong banking sector to support both the fiscal and economic measures that the government is introducing,” said Mr Garcia.

However, in spite of efforts to win what he can in terms of additional federal support, the governor is determined to enact a largely homegrown solution to the deficit.

“The credit ratings agencies can’t believe we’re doing what we’re doing but we’re serious about this: we’re going to bring Puerto Rico back to growth,” said Mr Fortuño. “I told them we’re going to address this this next year.”

He has set a target of saving $2bn from a $10.8bn budget, enacting serious austerity measures and last week announced the government would be laying off almost 17,000 workers.

His government is predicting a 5.5 per cent decline in real gross national product this year followed by a 0.7 per cent increase next year.

Unlike some Republican governors he is not critical of the stimulus money, although he would like more autonomy on how to spend it. “I wish we had a bit more leeway on that but I’m not giving it back,” he said.

But he does not diverge from his party in a belief in low taxes, which has helped to attract pharmaceutical companies such as Merck and Pfizer to the island, and encouraged the development of a life sciences sector, which boasts skilled workers and research and development tax credits.

Mr Fortuño said “aggressive public private partnership” legislation would help to attract new businesses. “We want to showcase different opportunities for the development of ports, airports, tourism and development projects,” he said.

His Washington visit included a meeting with Pharmaceutical Research and Manufacturers of America, the drugmakers’ lobby group. He is offering his political voice to try to delay the expiration of patents on medicines, which would hurt one of the most successful industries on Puerto Rico.

Ultimately, like many Puerto Ricans, Mr Fortuño wants the status resolved for good – whether it is to remain a territory or make a change to permanent statehood or independence. “The founding fathers when they drafted the constitution never intended the territorial status to last for ever,” he said.