Moody`s pushes Puerto Rico debt deep into junk status

Ratings company Moody`s on Tuesday slashed Puerto Rico`s debt rating by three notches into even deeper junk status after the US territory passed a debt-restructuring law.

Moody`s Investors Service cut the rating to "B2" from "Ba2" and said the outlook was negative, indicating further downgrades were possible.

Now dubbed the "Greece of the Caribbean," the archipelago is, like Greece, reeling under massive debt.

Over the past decade, the commonwealth`s debt has doubled to nearly $70 billion and investors are growing increasingly worried the government is running out of cash.

In a bid for debt relief, the Puerto Rican authorities recently adopted a law that allows for the restructuring of part of its debt by allowing public corporations to defer or reduce payments on outstanding payments, to the detriment of creditors.

According to Moody`s, the law approved last week affects $14.4 billion in bonds.

"By providing for defaults by certain issuers that the central government has long supported, Puerto Rico`s new law marks an end to the commonwealth`s long history of taking actions needed to support its debt," the ratings firm said in a statement.

"It signals a depleted capacity for revenue increases and austerity measures, and a new preference for shifting fiscal pressures to creditors, which, in our view, has implications for all of Puerto Rico`s debt, including that of the central government."

Moody`s said the commonwealth may find it difficult to maintain market access and investor confidence if its largest public corporations negotiate new debt terms or otherwise impinge on bondholder rights.

"A restructuring that involves an extension of maturities with the same or lower coupons, or reduces the security of the bonds is a default by Moody`s definition."

The financial problems of the Caribbean island, which has a population of only 3.7 million, have shaken the large market for US municipal bonds, especially in the wake of the default last year by the city of Detroit.

Enjoying broader tax breaks than most issuers in that market, Puerto Rico was able to issue huge amounts of debt over the past decade, meant to finance a buildup of infrastructure and revitalize the island`s economy.

But the economy has continued to stumble, contracting every year since 2006 even as the US economy has rebounded in the past four years.

President Barack Obama`s administration has set up a task force to try to find solutions for Puerto Rico, which lacks the legal means to declare bankruptcy.