In a context of over optimism, the new Fiscal Plan certified by the Financial Oversight Board rests on the premise that the structural reforms to be imposed on the island will guarantee the end of the economic contraction. If this assumption leads to Puerto Rico starting to service debt before those reforms actually impact the economy, the island will have risked and likely undermined the possibility of a sustained recovery. That was the message conveyed to the press today by Martin Guzman, recognized international expert in public-debt crisis who in 2017 chaired a debt-analysis project sponsored by Espacios Abiertos aimed at recovering the sustainability of Puerto Rico’s debt. Guzman’s report showed that Puerto Rico’s public debt is not sustainable and should be restructured. His statements came at a roundtable convened by Espacios Abiertos to analyze the Fiscal Plan certified and published by the Board last week.
“Hurricanes Irma and Maria intensified the dramatic situation of Puerto Rico. Even before September, it was more than clear that to address the crisis the island’s policies had to change, and that was not possible without a substantial reduction in the unsustainable debt burden the island faced, and that it still faces. The previous fiscal plan, certified in March of 2017, instead of promoting a recovery, was going to do even more harm. The post-Maria scenario opened a window of opportunity to reformulate the fiscal plan, but from what we have seen, the new plan certified by the Board employs a number of assumptions that are almost as excessively optimistic as those of the previously certified Fiscal Plan (2017) and those of the Puerto Rico government’s fiscal plan. These assumptions may lead to debt payments that are unjustified, not based on a sound assessment of the current reality the island faces, and dangerous for the future of the people of Puerto Rico,” Guzman said.
The new certified fiscal plan is, in addition, ambiguous with respect to whether there will be debt service in the short-term and how much the debt face value reduction will be. “Puerto Rico’s recovery requires zero debt service until Puerto Rico begins growing sustainably. Doing otherwise is economically and socially reckless. The ambiguity of the Plan leads to a risk of servicing the debt on the basis of excessive optimism, resulting in an even more profound crisis. But it also leaves room for the debt restructuring that is effective for restoring the sustainability of the public debt,” the debt-restructuring expert stated.
Cecille Blondet, Executive Director of Espacios Abiertos, agrees. “On the other hand, that ambiguity offers room for citizens to advocate against immediate payment of the debt and in favor of a coherent restructuration based on the most reliable data and objective information.” Blondet said this in remarks related to Espacios Abiertos’ request for access to information on the assumptions used by the government of Puerto Rico in its fiscal plan and the lawsuit to that end to be heard in the appellate section of the Court of First Instance in San Juan.
“The austerity policies have already cost lives, cost exile, cost us the ability to recover from a natural event that is quite common in the Caribbean. As citizens, we demand a more just and equitable society, a society more transparent and participatory. We reject the Board’s austerity policies because they are not equitable, and they harm the island’s most vulnerable. We need active citizens who understand the tremendous risk to their lives entailed by these policies and who will advocate for a halt to the debt payment until Puerto Rico has begun to grow again. As Professor Guzman has said on other occasions, ‘the dead can’t pay their debts.’ If our public policies devastate our economy, then we’ll never be able to pay our debt, or recover from this crisis for decades.”
Before Hurricane Maria, if Puerto Rico was going to be able to pay off its debt without strangling its economic and social development, a total cancellation of the interest on the public debt and reductions of up to ninety percent of the principal was necessary. Now, after the effects of Maria, the debt reduction cannot be less than that. That is the conclusion of the Debt Sustainability Analysis report produced by economist Martin Guzman along with Nobel laureate Joseph Stiglitz and Pablo Gluzmann and presented in January by Espacios Abiertos.
Martin Guzman is a researcher at the Columbia University Business School in New York and professor of Economics at the University of Buenos Aires.