S&P downgrades Puerto Rico debt to junk status

SAN JUAN, Puerto Rico (AP) -- Credit-rating agency Standard & Poor's downgraded Puerto Rico's debt to junk status Tuesday, a decision that frustrated island officials who said they had taken at times painful steps to reduce government spending and boost revenue amid an eight-year recession.

Gov. Alejandro Garcia Padilla said it was not a surprise that S&P cut the rating one notch to "BB+," one level below investment grade, but he called the move unfair and unnecessary.

"Every time we did something they requested, they moved the line further back," he said. "We have addressed every issue they have brought up."

The announcement comes as the U.S. territory prepares to return to the bond market this month, and S&P said the downgrade would have been more severe without recent reductions in the Puerto Rican government's budget deficit and its overhaul of strained public pension systems.

Eduardo Bhatia, president of Puerto Rico's senate, expressed anger at S&P and questioned how a credit agency that he said supported a move by the previous Puerto Rico administration to borrow $16 billion now decided to downgrade the island's debt.

"Today, it turns around and stabs us in the back," he said. "For the past year, we've met their demands and our people have made great sacrifices to improve the fiscal situation and honor all that debt they endorsed."

Economists say years of deficits under previous Puerto Rican administrations led to the majority of the government's outstanding $70 billion debt.

S&P's 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. "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."

David Tawil, co-founder and portfolio manager of New York-based Maglan Capital, said it was unclear whether a big sell-off in Puerto Rico bonds might occur Wednesday as a result of the downgrade.

"This is a pretty big mountain of debt that could come into the market," he said. "I don't think we'll know the ramifications until we're given a couple of days of trading activity. Tomorrow will be an interesting day to see how the market reacts."

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Associated Press writer Ben Fox in Miami contributed to this report.