SAN JUAN, Puerto Rico (AFP) — Puerto Rico proposed Monday that its creditors slash its debt by US$22.7 billion to enable the US territory to strengthen its finances and turn around its economy.

Just ahead of negotiations with bondholders, the struggling Caribbean island proposed that holders of its tax-funded debt — that is to be repaid with general government tax receipts — cut the total value from US$49.2 billion to US$26.5 billion.

It also proposed that interest payments, which would only begin in 2018, be limited to 15 per cent of current government revenues, down from the current draw of 36 per cent, which Puerto Rico says is “unsustainable”.

“This proposal is a reflection of our commitment to work with our creditors on a sustainable solution that does not place the burden on one stakeholder group alone,” said Puerto Rico Secretary of States Victor Suarez in a statement.

“A crisis of this magnitude must be addressed in concert, otherwise we risk our ability and the opportunity to escape the spiral of a stagnating economy, endless deficits and increasing debt.”

The island proposed that holders of the US$49.2 billion in debt agree to covert them to US$26.5 billion of new, mandatorily payable “Base Bonds”.

In compensation for the haircut, bondholders were also offered US$22.7 billion in new “Growth Bonds” which would only pay off if, after 10 years, Puerto Rico’s revenues exceed current baseline projections “as a result of real economic growth”.

“By sharing in the island’s economic recovery, creditors would have the opportunity to recover the principal amount of their investments,” the government said in a statement.

Puerto Rico has been locked in recession for a decade, and defaulted on some debt payments at the beginning of the year.

Despite sweeping spending cuts and some policy reforms, it has not been able to arrest the deterioration of its budget deficit.

The island has some US$70 billion in debt and has warned that it will continue to miss payments in the coming months.

The new bond exchange proposal is an opening bid to organise a large “voluntary” restructuring of its debt. The proposal was contingent on a large level of creditor participation.

Puerto Rico is blocked by US law from entering bankruptcy to force all of its creditors to negotiate a restructure of its debt.

In recent months it has sought, without success so far, for Congress to pass a law that would allow it to enter bankruptcy protection.