“If the debt is not properly restructured, there will be no new growth strategy that can be implemented”
-Martín Guzmán, author of the Study.
Before Hurricane Maria, in order for Puerto Rico to be able to pay off its debt without stifling its economic and social development, a total cancellation of interest on the public debt and reductions in principal value from 45 to 90 percent were necessary. Now, after the effects of the hurricane, the necessary debt relief is much greater. That concludes the Debt Sustainability Analysis (DSA), a study created by the economist Martín Guzmán together with the Nobel Prize winner for Economics Joseph Stiglitz and Pablo Gluzmann. Guzmán is a researcher at the Columbia University Business School and professor of Economics at the University of Buenos Aires. Espacios Abiertos commissioned the study, which will not only be made public on its website, but will also be sent to the Fiscal Control Board, the government of Puerto Rico, and will accompany a friend of the court appeal (Amicus Curiae) that the organization will present. Judge Taylor Swain in the Title III case.
Regarding the debt relief analysis, the study shows that "Puerto Rico's public debt is not sustainable and must be restructured," Guzmán explained at a press conference held today at the Espacios Abiertos headquarters. “The necessary write-off before Hurricane María was substantial. The computation is a function of the assumptions made regarding the effects of fiscal policies and structural reforms, as well as the definition of the relevant public debt stock. The necessary debt write-off calculations are conservative because several of the over-optimistic assumptions included in the Fiscal Plan were maintained, so that the analysis can be informative on restructuring needs in reference to the proposed Fiscal Plan. In all the scenarios analyzed, necessary haircuts are obtained that include a full cancellation of interest and reductions in the principal value of the debt of at least 45 percent of the relevant stock, and up to 80 percent of the relevant stock, so that adding necessary capital reductions plus interest, a fraction of up to 90 percent of the relevant stock is reached”.
Cecille Blondet, executive director of Open Spaces, explained that the non-profit organization commissioned the study to obtain a robust and persuasive mechanism against the austerity measures that have been imposed and are proposed in the country in the long term. “Our job is to promote a more just and equitable, more democratic and transparent society. Austerity policies have not been equitable, they are not capable of protecting the country's most vulnerable populations, and they have already cost us too much. We need to establish public and debt repayment policies that do not stifle the country's development possibilities. On the other hand, complexity also contributes to opacity. It's very important to us at EA that we turn this vital information into something everyone can understand, analyze and take action on. Information about our reality does not have to be complex. There are ways to make it understandable and we will also be working on that”.
Guzmán's study also analyzed the Fiscal Plan approved in March 2017 for the next decade and concludes that it is based on "unrealistic and inadequate assumptions that lead to an underestimation of the negative consequences that its implementation would have had for Puerto Rican society," he asserted. Guzman. That Fiscal Plan is currently being reviewed and the Governor is expected to deliver it to the Fiscal Control Board on January 24.
The Debt Relief Analysis includes a detailed study of these assumptions and thus constitutes a guide for the current fiscal plan review process.
"The analysis shows that the current review must not only incorporate the effects caused by Hurricane María, but also the fundamental assumptions on which the previous plan was based must be reviewed," added the Economist. “Circumscribing only to the new reality presented by the post-María scenario without modifying the assumptions on which the previous plan was based would again result in a failed analysis of what the needs of the Island are in terms of fiscal policy and debt to be able to recover."
Undoubtedly, Hurricane Maria has significant consequences on the necessary debt relief. But a precise calculation of that relief (or 'removal') in the new circumstances requires precise information on the costs inflicted by such a phenomenon, as well as on the aid that Puerto Rico will receive from the federal government. However, Guzmán warned that the analysis methodology remains valid and provides a direct guide to the government of Puerto Rico and the Fiscal Board for the presentation of a debt restructuring proposal.
The analysis also argues that debt restructuring is only a necessary condition for recovery. But it's not enough.
“Puerto Rico needs more than just restoring its debt sustainability,” Guzmán stressed. “It also needs a new growth strategy, an issue on which the CNE Growth Commission is working deeply. However, if the debt is not properly restructured, there will be no new growth strategy that can be implemented."