Study: No new growth strategy will work without debt restructuring
Before Hurricane María, 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 percent to 90 percent. Now, in the wake of the storm, the debt relief needed is much greater.
This was the conclusion reached in a study entitled, “Analysis of Puerto Rico’s debt relief needs to restore debt sustainability,” conducted by economist Martín Guzmán, along with Nobel Prize-winning economist Joseph Stiglitz and Pablo Gluzmann.
Guzmán is a researcher in the Columbia University business school and professor of Economics at the University of Buenos Aires.
Local nonprofit Espacios Abiertos commissioned the study, which it will not only publish on its website, but will also send to the Financial Oversight and Management Board for Puerto Rico and the island’s government, and will attach to an “amicus curiae” brief to Judge Swain in the Title III case, the organization confirmed.
“Puerto Rico’s public debt is not sustainable, and should be restructured,” Guzmán said at a press briefing held at the headquarters of Espacios Abiertos in Old San Juan.
“The necessary debt relief before Hurricane María 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,” he said.
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, Guzmán said.
“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,” he said.
Espacios Abiertos commissioned the study 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, said Cecille Blondet, executive director of Espacios Abiertos.
“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,” she said.
“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,” Blondet added.
Guzmán’s study also analyzed the Fiscal Plan for the next decade that the Oversight Board approved in March 2017, 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.”
That Fiscal Plan is currently being revised, and the governor is expected to submit it to the Oversight Board on Jan. 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 analysts said.
“The analysis shows not only that the current revision should incorporate the economic and social effects of Hurricane María, but also that the fundamental assumptions on which the first plan was based should be revised,” Guzmán added.
“Just circumscribing the revised plan to the new, post-María 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,” he said.
There is no question that Hurricane María 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, Guzmán 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 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 Center for a New Economy’s Growth Commission is doing a study,” Guzmán said.
“However, if the debt is not restructured in the appropriate way, there is no new growth strategy that will be able to be implemented,” he concluded.