It is no secret that Puerto Rico is in financial crisis. The U.S. territory owes $70 billion to a variety of creditors while the economy is in a recession. The commonwealth defaulted on its debt last July, marking the first time that any U.S. state or territory defaulted on general obligation bonds since the Great Depression.
While the bond markets did not collapse as a result—mostly because the default was widely expected—there is still the specter of considerable risk to the municipal bond market if Puerto Rico fails to restructure its debt in a manner that is fair to all of its debt holders.
Anyone who wants Puerto Rico to turn the page on this bleak chapter and start a path toward economic recovery, development, and growth would be wise to pay close attention to the current discussions and negotiations of the Puerto Rico Oversight Board and the ramifications of its proposed solutions.
The Oversight Board was created by Congress at the behest of President Obama as what seemed the only viable method for getting Puerto Rico out of its financial troubles. Under the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), seven appointees were tasked with approving a fiscal plan that reduces spending while putting in place pro-growth reforms.
The proposed plan for such reforms was to come from Puerto Rican officials, mainly recently elected Governor Ricardo Rosselló, who was elected on a platform of doing whatever is necessary to fix the Puerto Rican crisis. On Feb. 28 of this year, Rosselló laid out his initial plan for the Commonwealth. It was rejected by the Oversight Board, which said it “relied on overly optimistic revenue and economic growth forecasts.”
Two weeks later, months after the initial deadline to create a fiscal plan, the PROMESA board approved a plan that includes limited spending cuts. While the cuts might be a good start, they don’t go far enough, as some fear the plan’s projections are unrealistic.
The plan would lead to a dramatic reduction of the amount that will be repaid to creditors (a “haircut” in finance jargon). Some of the proposed reductions are well over 70 percent, amounts so large that it is highly likely to severely limit Puerto Rico’s future ability to borrow, as it is difficult to envision how potential investors could have enough confidence to commit to making serious investments.
In addition, the Puerto Rican government has been working on a deal apart from the restructuring plan, with owners of Puerto Rico Electric Power Authority (PREPA) bonds. The fact that this deal will give PREPA bond owners around a 7-8 percent haircut while non-PREPA bond owners take a 77 percent haircut is hard to understand, especially since Puerto Rico could potentially save billions of dollars by negotiating better concessions from PREPA creditors. A reasonable PREPA deal would also leave room for the commonwealth to negotiate a fair deal with its other creditors, and stave off drastic increases in future borrowing costs.
Puerto Rico has very little time to negotiate with creditors, as the government will be exposed to litigation on May 1, an option that some bond holders are almost certain to exercise. Such a move would come in addition to some unfortunate in-fighting between creditors: general obligation bondholders have already filed a lawsuit against holders of sales tax-backed bonds (known as COFINA bonds).
With COFINA bonds being the most widely held locally, public pensions that owe $45 billion in benefits, and many retirees living under the poverty line, such expensive litigation could throw yet another wrench in the works and make recovery out of reach for Puerto Rico.
With a crisis of such magnitude and with multiple dimensions, the only real answer might be for Congress to push for more oversight to avoid an even deeper mess. As a U.S. territory, Puerto Rico has nowhere to go but to the federal government and mainland taxpayers, so Congress may not have much choice in the long term.
For Puerto Rico to have a chance at real economic recovery, it is going to need substantive tax reform, a large reduction in government overspending, and a comprehensive, transparent, realistic restructuring plan for its creditors.
The clock is ticking on the Oversight Board, and ultimately, on Congress.
Mario H. Lopez is president of the Hispanic Leadership Fund, an advocacy organization that supports public policy that fosters liberty, opportunity, and prosperity for all Americans.
The views expressed by contributors are their own and are not the views of The Hill.
BY MARIO LOPEZ, OPINION CONTRIBUTORCongress must act on Puerto Rico before it's mired in litigation
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