Feb 10 (Reuters) - Puerto Rico Governor Alejandro Garcia Padilla has asked the legislature for approval to borrow up to $3.5 billion with new general obligation bonds.
The request was included in a bill submitted late Friday, hours after Moody's Investor Service became the second ratings agency to cut the U.S. commonwealth's credit rating to junk status. Standard & Poor's cut the island's rating to junk three days earlier.
Puerto Rico, a U.S. territory, has some $70 billion in debt outstanding, and financial markets are worried that the recent downgrades could push it toward default, an outcome that could roil the $3.7 trillion municipal bond market.
About 70 percent of U.S. municipal bond mutual funds hold Puerto Rico debt because it offers high yields and is tax free in all 50 states. Puerto Rico is not eligible to file for Chapter 9 municipal bankruptcy protection.
Both Moody's and S&P said Puerto Rico's failure to tap the bond market late last year heightened worries about liquidity and contributed to the downgrades.
According to the bill, proceeds would be used in part to pay or refinance outstanding general obligation debt as well as debt and obligations from public corporations.
The legislation has not been approved. Betsy Nazario, a spokeswoman for the Government Development Bank, declined to discuss details before a teleconference scheduled for Wednesday.
Garcia Padilla was expected to give a televised address later on Monday to detail fiscal control measures his administration will take in the wake of the credit downgrade.
Last week, he pledged to cut the current fiscal year deficit by $170 million and renegotiate contracts subject to nearly $1 billion in accelerated payments and increased collateral requirements due to the credit downgrade.
The government is aiming to balance its budget in fiscal year 2015, which begins on July 1.
Garcia Padilla's request follows recent action by the legislature to authorize more borrowing through the Sales Tax Financing Authority, known by its Spanish acronym, Cofina. Cofina issues Puerto Rico's highest-rated bonds, which are backed directly by the sales and use tax.
A source who spoke on condition of anonymity said general obligation bonds carry a greater borrowing capacity.