Yahoo Finance 
If Puerto Rico is going down, it could start this weekend
(Reuters)
Puerto Rico on Saturday could go into default on a chunk of its $72 billion debt.
That's when the island owes hundreds of millions of dollars' worth of payments on bonds issued by a number of the island's government agencies.
The question is which ones will and will not get paid out.
A likely "not" is a $58 million payment on Puerto Rico's Public Finance Corporation (PFC) debt. Earlier this month bondholders were told that funds had not been transferred to the trustee responsible for making the payment.
"The government likely wants to use the PFC payment as a sort of trial balloon to see how creditors react and hope that some of the bondholders will be scared into providing them with some relief," analysts at Eurasia Group said in a recent note.
Puerto Rico's government at the end of June sounded the alarm that its debt burden had become far too large for it to handle. The island's economy has contracted in every year but one since 2006. Wages are stagnant, the population has shrunk over the past decade by around 7%, and the country's unemployment rate has topped 12%.
Investors were shocked by the announcement. Even "bond god" Jeff Gundlach of DoubleLine Capital had previously said the island could restructure its general obligation bond debt payments and get investors about $0.80 cents on the dollar.
Now that isn't looking like it will happen.
What's more, Puerto Rico cannot declare bankruptcy, according to its own constitution. That's why economists hired by the island's hedge fund creditors have recommended that politicians implement a series of tax hikes and budget cuts, otherwise known as a policy of austerity.
(Reuters)
Protesters during a demonstration along Park Avenue in New York on Thursday. Protesters carrying a vulture puppet and chanting in Spanish marched outside the Park Avenue offices of a major holder of Puerto Rico's debt to protest proposed austerity measures.
That is something Gov. Alejandro Garcia Padilla of Puerto Rico will most likely try to fight. He said last month that his administration was doing everything it could to avoid default.
"But we have to make the economy grow," he added. "If not, we will be in a death spiral."
There is no appetite for a Puerto Rico bailout in Washington — especially not among Republicans — and there is no desire to restructure Chapter 9 of the US bankruptcy code in order to create a special mechanism to restructure debt for individual entities in the US territory.
Most likely, according to Eurasia Group analyst Corey Boles, is that a special committee will be appointed to carry out budget and policy reforms.
"While this would be politically difficult on the island, it's possible that a new administration in Puerto Rico in 2017 could ask Washington to create such an entity, arguing for example, that it had inherited a fiscal mess and needed help to push through messy reforms," Boles wrote.
He added that that was unlikely to take place until after the elections on the island in November 2016.
"Such a panel could then embark upon a drastic platform of slash-and-burn policies unpalatable to Governor Padilla."
But that feels a long way away when the island could go into default on some bond payments in the next 24 hours.
We're about to find out how much patience the island's hedge fund creditors have.
NOW WATCH: What Adderall is actually doing to your body
More From Business Insider
