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Puerto Rico has begun to default, governor says; status of payment unclear

Puerto Rico's Governor Alejandro Garcia Padilla delivers his state of the Commonwealth address at the Capitol building in San Juan, Puerto Rico April 30, 2015. REUTERS/Alvin Baez

By Megan Davies and Nick Brown NEW YORK/SAN JUAN (Reuters) - Puerto Rico has begun to default on its debt in order to pay top-priority borrowings backed by its constitution and protect the commonwealth's people, Governor Alejandro Garcia Padilla said on Tuesday, but the status of a Dec. 1 payment remained unclear. There had been speculation that the U.S. territory would default on all or part of its $355 million notes issued by its financing arm, the Government Development Bank, and due Dec. 1. A default could trigger lawsuits, further spook investors and undermine the island's efforts to climb out of $72 billion in debt. "The imminence of a default when presented with the alternative between paying creditors and providing essential government services looms large," Garcia Padilla told the U.S. Senate Judiciary Committee. "That is why starting today the commonwealth of Puerto Rico will have to claw back revenues pledged to certain bonds issued in order to maintain public services." In written testimony, Garcia Padilla said: "In simple terms, we have begun to default on our debt in an effort to attempt to repay bonds issued with the full faith and credit of the commonwealth and secure sufficient resources to protect the life, health, safety and welfare of the people of Puerto Rico." Height Securities analyst Daniel Hanson said the comments meant Puerto Rico was defaulting on "instrumentality debt, not debt with a constitutional pledge." Bonds such as GDB debt which has a guarantee, and general obligation debt should be safe, he said, but bonds from entities such as highway authority PRHTA and infrastructure financing authority PRIFA are at risk. Of the $355 million of GDB debt service due Dec. 1, $81.4 million is non-general obligation-backed debt and $273.3 million are notes backed by the commonwealth's general obligation guarantee. During the hearing Senator Richard Blumenthal, a democrat, said that on Tuesday Puerto Rico "narrowly averted a complete default" but avoided it by unsustainable financial gymnastics. It was unclear if he was referring directly to the Dec. 1 payment. The payment on bonds issued by the GDB is crucial as Puerto Rico tries to stretch its liquidity into 2016 to provide more time to restructure debt. Puerto Rico has defaulted before. In August, it paid only $628,000 of a $58 million payment due on its Public Finance Corp bonds. (By Megan Davies and Nick Brown; Editing by Lisa Von Ahn; Editing by Lisa Von Ahn)