April 13, 2016 / 11:33 PM / 2 years ago

Puerto Rico creditors cancel lawsuit after governor's emergency order

SAN JUAN, April 13 (Reuters) - - Creditors of Puerto Rico’s Government Development Bank on Wednesday withdrew a lawsuit that sought to prevent a run on the bank ahead of a $422 million debt payment due on May 1.

Hedge funds including Brigade Capital Management and Claren Road Asset Management, which hold some of GDB’s $3.75 billion in debt, said in a statement that the lawsuit had no purpose now that Puerto Rico Governor Alejandro Garcia Padilla has declared a fiscal emergency at the bank.

The emergency declaration, issued on Saturday, prevents GDB from lending and paying certain debts, and blocks depositors from withdrawing any money not required to fund essential services. This is essentially what the creditors had sought in their lawsuit, which was filed four days before Garcia Padilla’s declaration.

Puerto Rico faces $70 billion in total debt, a 45 percent poverty rate, and a shrinking population, all of which threaten to collapse its economy. GDB owes creditors $422 million on May 1, a payment Garcia Padilla has said it cannot afford.

The emergency declaration aimed to keep money in the bank while the bank negotiates a restructuring with creditors.

While the U.S. territory has missed some minor debt payments in the last year, a default at GDB - the primary liquidity source for the island’s public entities - would be by far the most significant.

Default would also likely push the bank into receivership. Efforts to avoid that fate parallel a push by federal lawmakers to find a legislative solution to Puerto Rico’s debt.

Reporting by Nick Brown; Editing by Tom Brown

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