If the debt is not restructured in an appropriate way,
there is no new growth strategy that will be able to be implemented.
–Martin Guzman, study author
San Juan, PR, 1/16/2018 Before Hurricane Maria, if Puerto Rico were to pay off its debt without completely choking off economic and social development, it needed a total cancellation of the interest on the public debt and a reduction in the principal of approximately 45 to 90 percent. Now, in the aftermath of the hurricane, the necessary debt relief is much greater. This is the conclusion reached by a study, “Analysis of Puerto Rico’s debt relief needs to restore debt sustainability,” by economist Martin Guzman, along with Nobel Prize-winning economist Joseph Stiglitz and Pablo Gluzmann. Guzman is a researcher in the Columbia University business school and professor of Economics at the University of Buenos Aires. Espacios Abiertos commissioned the study, which it will not only publish on its website but will also send to the Financial Oversight Board and the government of Puerto Rico, and will attach to an amicus curiae brief to Judge Swain in the Title III case.
With respect to the question of debt relief, the study concludes that “Puerto Rico’s public debt is not sustainable, and should be restructured,” Guzman explained today at a press briefing held at the headquarters of Espacios Abiertos. “The necessary debt relief before Hurricane Maria was substantial. Computation of the necessary debt relief is a function of the assumptions made with respect to the effects of the fiscal policies and structural reforms put in place, as well as of the definition of the stock of relevant public debt. The computations for the necessary debt relief are conservative because several of the over-optimistic assumptions included in the Fiscal Plan were retained, so the analysis may be informative as to the restructuring needs in reference to the proposed Fiscal Plan. In all the scenarios analyzed, the necessary debt relief—including a total cancellation of interest and reductions in the debt principal of at least 45 percent of the relevant stock and up to 80 percent of the relevant stock—were obtained, so that adding together the necessary reductions of capital plus interest, the result was a fractioning of up to 90 percent of the relevant stock.”
Cecille Blondet, Executive Director of Espacios Abiertos, explained that the non-profit organization commissioned the study in order to obtain a robust and persuasive mechanism for arguing against the austerity measures already imposed and those proposed for the island in the long term. “Our work is to promote a society that is fairer and more equitable, more democratic and transparent. Austerity policies have not been equitable; they are incapable of protecting the most vulnerable sectors of our society, and they’ve already cost us too much. We need to establish public policies and policies for repaying the debt that don’t stifle the possibility of development on the island. We also know that the complexity of the problem contributes to the opacity of the process. For us at EA, it’s very important to turn this vital information into something that everyone can understand, analyze, and take action on. Information on our situation doesn’t have to be complex. There are ways to make it comprehensible and we’re also working on that.”
Guzman’s study also analyzed the Fiscal Plan for the next decade approved in March of 2017 by the Financial Oversight Board, and it concludes that the plan is based on “unrealistic and inadequate assumptions that lead to an underestimation of the negative consequences for Puerto Rican society that its implementation would have,” Guzman stated. That Fiscal Plan is currently being revised, and the Governor is expected to submit it to the Financial Oversight Board on January 24.
The Debt Relief Analysis includes a detailed study of those assumptions, and thus represents a guide for the revision of the Fiscal plan now under way.
“The analysis shows not only that the current revision should incorporate the economic and social effects of Hurricane Maria, but also that the fundamental assumptions on which the first plan was based should be revised,” Guzman added. “Just circumscribing the revised plan to the new, post-Maria scenario, without modifying the assumptions on which the previous plan was based, will once again result in a flawed analysis of the island’s needs with respect to fiscal and debt policy for its recovery.”
There is no question that Hurricane Maria has had significant consequences with respect to the degree of necessary debt relief. But precise computation of the necessary debt relief under these new circumstances requires accurate information on the costs of the storm and on the aid Puerto Rico will receive from the federal government. Nevertheless, Guzman noted that the methodology of the analysis remains valid, and that the study provides a direct guide for the government of Puerto Rico and the Financial Oversight Board for the presentation of a debt-restructuring proposal.
The analysis also argues that debt restructuring is just one condition, and far from a sufficient one, on which economic recovery will depend.
“Puerto Rico needs more than simply restoring debt sustainability; it also needs a new strategy for growth, a subject on which the CNE’s Growth Commission is doing a study. However, if the debt is not restructured in the appropriate way, there is no new growth strategy that will be able to be implemented.”