Puerto Rico’s cooperativa system—consisting of state-insuredcredit unions—faces huge financial losses and could collapse,costing low-income residents their life savings, the territory’sGovernor, Alejandro Garcia Padilla told the federal oversight boardoverseeing Puerto Rico’s financial restructuring.

In an Oct. 14 presentation to the oversight board, Padilla saidthat the cooperativas hold deposits for one-third of all islandresidents and have investment portfolios that are about 75%invested in commonwealth bonds.

Puerto Rico faces a huge fiscal crisis and the island governmenthas been unable to pay its debts. Earlier this year, Congresspassed legislation creating the oversight board, which is chargedwith restructuring the government and its debt. Therestructuring must protect the cooperativa system, Padillasaid.

Cooperativas are financial institutions insured by a territorygovernment agency, the Corporation for the Supervision andInsurance of Cooperatives. There are more than 100 cooperativas inPuerto Rico in addition to 11 credit unions that are insured by theNCUA. The cooperativas currently have more than 966,000members.

As of March 2016, total insured shares and deposits in thecooperativas totaled about $8.2 billion, the governor said.

Padilla outlined the precarious condition of the financialinstitutions. He said that due to default on island bonds, thecooperativas are expected to sustain substantial losses in theirportfolios and will likely suffer additional losses if thecommonwealth restructures its debt.

As a result of those losses, the cooperativas will have alimited ability to continue to lend money to help drive economicgrowth and employees will lose their jobs. And the entiresystem could face collapse, as depositors move their funds toFDIC-insured financial institutions, he said.

In an effort to stave off the cooperativa crisis, the islandgovernment has been negotiating with the cooperativas that holdgovernment bonds. The governor said that certain cooperativashave agreed to extend, for a year, the $40 million principalpayment that was due on May 1, 2016.

Negotiations with other cooperativas and creditors arecontinuing, Padilla said.

Attorney Jose Sosa-Llorens, who represents several of the majorcooperativas, has said Congress should consider granting the NCUA the authorityto guarantee the cooperativas’ deposit insurance.

However, the legislation enacted by Congress and signed byPresident Obama does not include such a proposal.