Fitch cuts Puerto Rico's debt to junk status

Fitch Ratings said Tuesday it was cutting Puerto Rico's debt rating to junk status, citing financial pressures stemming from downgrades by two other major ratings agencies on the US territory's high debt. Fitch lowered the rating by two notches, to BB -- in the "speculative" or junk territory -- from BBB-, the low-investment grade category. "Recent downgrades have triggered new liquidity requirements and lowered expectations for the market available for the commonwealth's debt going forward, though there have been no significant negative developments regarding the commonwealth's finances or economy since November," Fitch said in a statement. Fitch said the rating outlook for the struggling Caribbean island was negative, signaling a further downgrade may be forthcoming. The action came after two other major ratings firms downgraded Puerto Rico's debt to junk status last week. Standard & Poor's was the first to make the move, saying a week ago that the US territory was facing a liquidity squeeze due to high debts and a high deficit. Moody's Investors Service followed suit on Friday. "Fitch believes that the non-investment-grade ratings will reduce the market available for the commonwealth's debt going forward, thereby diminishing financial flexibility as the administration moves forward with its fiscal stabilization efforts," the rating firm said. The government has been seeking $2 billion in fresh financing in recent weeks. Governor Alejandro Garcia Padillo said last week after the S&P downgrade that the government, struggling to service some $70 billion in debt, would try to renegotiate loans for which the ratings cut triggered an acceleration of payments. The downgrades added significantly to the liquidity pressures, raising the costs of servicing the debt, especially on short-term bonds. On Tuesday, Puerto Rico's treasury secretary, Melba Acosta Febo, and Government Development Bank for Puerto Rico (GDB) chairman David Chafey said they were "disappointed" with Fitch's decision. But they said they were "pleased that it has recognized Puerto Rico's quick and decisive response to challenges that have arisen in recent years" as well as "significant progress in addressing longstanding fiscal and economic issues." Shortly before the Fitch announcement, the GDB said that Puerto Rico had hired Morgan Stanley, British bank Barclays and RBC Capital Markets, a Canadian investment bank, for an upcoming bond sale aimed at helping the territory address its liquidity squeeze. The financial problems of the 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. Puerto Rico's official unemployment rate is 14.7 percent, more than double that of the United States, and the debt burden is equivalent to 93 percent of the island's gross domestic product -- more than the debt-to-GDP ratio of troubled Spain.