After two days of hearings, Judge Laura Taylor Swain must decide whether or not to approve the agreement proposed by the Government, the Board and the Legislature to COFINA bondholders. The Government and the Board have kept the public out of this process. There has been no openness to citizen participation, even though it is our money, it is our services and it is the future of our sons and daughters and our Island that is at stake. You can still express your opinion to the judge before she issues her decision.
Write to his email: SwainDPRCorresp@nysd.uscourts.gov
What do the experts tell us about the restructuring of COFINA? In short, everyone agrees that the agreement as it stands is a recipe for failure.
Attached we summarize the opinion of Martín Guzmán, the expert in debt restructuring and collaborator of the Nobel Prize winner in Economics, Joseph Stiglitz, who spoke with a group of journalists today in San Juan.
RECIPE TO FAILURE
What has been happening in Puerto Rico during the last year is worrying. While the latest fiscal plan has revised some of the assumptions in the right direction, it still offers an overly optimistic view of the effect the proposed reforms will have on the island's future. And the worst part is the COFINA agreement, which could leave the Puerto Rican economy trapped in a destabilizing dynamic of recession.
While the COFINA deal numbers have been touted as a “savings,” the reality looks less rosy than has been suggested. The COFINA agreement is not a simple exchange of old bonds for new bonds with less value. Bondholders gain from this exchange in important dimensions. And that comes out of the pockets of Puerto Ricans.
First, the new bonds are safer, because they have another seniority or priority for repayment. While the old bonds were a combination of senior and junior bonds, the new bonds are all senior. So the old junior bonds are supposedly suffering the biggest haircut, but they are gaining in seniority. In fact, the agreement results in a recovery value substantially higher than what was expected in the markets a year ago, as shown by the increase in the prices of these bonds.
Second, the payment structure is such that they will grow over time to a magnitude that is difficult to sustain. From $420 million in fiscal year 2019 to almost $1.000 billion in fiscal year 2041. This would not be a problem if Puerto Rico's economy were to grow proportionally during that period, but that is not a reasonable expectation in the current circumstances (nor the The Board thinks that this is going to happen, as the latest fiscal plan shows).
If this agreement is approved, the Puerto Rican society will pay nearly $33.000 million to its COFINA creditors for a principal value that before the restructuring was $17.800 million. And on all bonds that will be senior, whose payments should be discounted at a low rate. This does not seem to constitute much of a saving.
The debt payment capacity revealed by both our calculations and those of other authors who obtained similar results using different methodologies, implies that the generosity towards COFINA bondholders will leave almost nothing for the rest of the creditors. The COFINA agreement sets a dangerous precedent. If similar terms are agreed to with General Obligation bondholders, Puerto Rico will be forced to declare another default or suffer enormous cuts in its public spending that would put the economy back on a path of depressed activity and emigration instead. to allow you to prolong your recovery. The rebound in activity is being the consequence of the fiscal expansion that post-Maria federal aid is giving rise to, and not of fiscal austerity. This is consistent with the notion that Puerto Rico was in a regime of insufficient aggregate demand.
The debt restructuring process requires a comprehensive approach to all debts, rather than one that tries to fit together loose pieces one by one. This is not happening. The junta continues to support too many debt payments and too much austerity, while showing excessive faith in the virtues of structural reforms in a recessionary economy. Overestimating your debt-paying capacity is a recipe for failure. It is the way to leave the country with an unpayable burden that maintains levels of uncertainty that discourage investments, which eventually ends with another costly restructuring. There is plenty of evidence about the negative consequences of the path that is being followed. If Puerto Rico's debt is not properly restructured, it will remain in an economic, debt, and emigration crisis trap.