An emerging consensus on Puerto Rico's debt

There is emerging consensus on Puerto Rico's debt. It involves some form of a federal financial-control board, a legal structure for debt restructuring and somewhat better treatment of Puerto Rico on some federal programs. The concept that providing a mechanism for debt restructuring is a bailout is becoming discredited.

Initially, Anne Krueger, a consultant to the Puerto Rican government, advocated some form of debt restructuring. Later, she was joined by the likes of Nobel Prize-winner Joseph Stiglitz, economists from the Federal Reserve Board and economists from the U.S. Treasury Department. Lately, they have been joined by the likes of Desmond Lachman of the conservative think tank American Enterprise Institute, who published a column in The Hill favoring a legal framework for restructuring Puerto Rico debt.

Initially, mainstream media such as The New York Times published editorials advocating debt restructuring for Puerto Rico. Later, stalwarts from the financial media such as Bloomberg, joined in. Lately, the investor-friendly Wall Street Journal published an editorial favoring a legal mechanism for restructuring Puerto Rico's debt.

Bondholders tried to frame the discussion as one between themselves and the government of Puerto Rico as to which route was best for the well-being of Puerto Ricans. As of now, every significant segment of Puerto Rico's civil society is in favor of a legal framework for debt restructuring. This runs the gamut from religious leaders to local media and professional associations, to former Puerto Rico Gov. Luis Fortuño, who is a Republican. The few local Republican politicians who initially opposed debt restructuring have gone quiet.

Testimony before Congress by Puerto Ricans underlines the need for a legal framework to restructure debt. Richard Carrión, the chairman and CEO of Banco Popular, the largest commercial bank on the island, spoke not only about the need for a legal bankruptcy framework, but also his concern about Puerto Rico's pension liabilities. The government of Puerto Rico has already enacted legislation that resulted in most public sector employees enrolled in a defined contribution system with an employer matching contribution of zero. This is a more aggressive pension reform than the one declared unconstitutional in Illinois or the one imposed as part of the Detroit bankruptcy case.

The problem is that constitutionally, the Puerto Rican government cannot change the vested benefits of retirees or even present employees. When the pension funds run out of money in 2018, it will require some $800 million a year from the central government to pay the retirees. Proportionately to the U.S. economy, this would be the equivalent of an increase in government spending of $200 billion a year. Therefore, regardless of a federal financial-control board, government spending will have to increase unless the issue of vested pension benefits is examined as part of a debt-restructuring process.

Carlos Rivera recently testified before Congress on behalf of Puerto Rico's Private Sector Coalition, an umbrella organization comprising a wide range of private sector interests. In his testimony, Rivera spoke about the need for a legal bankruptcy framework for the island, and his concern about the preliminary debt-restructuring agreement with the Puerto Rico Electric Power Authority (PREPA).

PREPA is a government-owned corporation along the lines of the Tennessee Valley Authority. It is not part of Puerto Rico's central government budget. PREPA's equity position is negative $1.7 billion. Since it cannot file for bankruptcy, a preliminary agreement was reached that would provide some debt relief in exchange for significant rate increases to pay bondholders and perform necessary investments. While PREPA has been coy about how much the actual rate increase will be, the figure of 30 percent has been mentioned. This would be the equivalent of a tax of close to $1 billion a year on the people of Puerto Rico. The proportional figure for the U.S. economy would be somewhat around $240 billion annually. The comparison is not straightforward because, unlike Puerto Rico, the U.S. economy has not been contracting throughout the last decade and the U.S. is not losing population at a rate of almost 2 percent per year. Rivera's concerns are understandable.

Only two Puerto Ricans have testified in Congress against a legal framework for debt restructuring: a lawyer representing bondholders and an academic. Those opposing debt restructuring are an increasingly isolated group.

Feliciano is president of Advantage Business Consulting, which provides consulting services to the government of Puerto Rico on economic and tax policies, but not debt policy.

An emerging consensus on Puerto Rico's debt