Puerto Rico’s cooperativa system—consisting of state-insured credit unions—faces huge financial losses and could collapse, costing low-income residents their life savings, the territory’s Governor, Alejandro Garcia Padilla told the federal oversight board overseeing Puerto Rico’s financial restructuring.
In an Oct. 14 presentation to the oversight board, Padilla said that the cooperativas hold deposits for one-third of all island residents and have investment portfolios that are about 75% invested in commonwealth bonds.
Puerto Rico faces a huge fiscal crisis and the island government has been unable to pay its debts. Earlier this year, Congress passed legislation creating the oversight board, which is charged with restructuring the government and its debt. The restructuring must protect the cooperativa system, Padilla said.
Cooperativas are financial institutions insured by a territory government agency, the Corporation for the Supervision and Insurance of Cooperatives. There are more than 100 cooperativas in Puerto Rico in addition to 11 credit unions that are insured by the NCUA. The cooperativas currently have more than 966,000 members.
As of March 2016, total insured shares and deposits in the cooperativas totaled about $8.2 billion, the governor said.
Padilla outlined the precarious condition of the financial institutions. He said that due to default on island bonds, the cooperativas are expected to sustain substantial losses in their portfolios and will likely suffer additional losses if the commonwealth restructures its debt.
As a result of those losses, the cooperativas will have a limited ability to continue to lend money to help drive economic growth and employees will lose their jobs. And the entire system could face collapse, as depositors move their funds to FDIC-insured financial institutions, he said.
In an effort to stave off the cooperativa crisis, the island government has been negotiating with the cooperativas that hold government bonds. The governor said that certain cooperativas have agreed to extend, for a year, the $40 million principal payment that was due on May 1, 2016.
Negotiations with other cooperativas and creditors are continuing, Padilla said.
Attorney Jose Sosa-Llorens, who represents several of the major cooperativas, has said Congress should consider granting the NCUA the authority to guarantee the cooperativas’ deposit insurance.
However, the legislation enacted by Congress and signed by President Obama does not include such a proposal.
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