Bankruptcy’s appalling comfort

December 19, 2019

Last week, El Vocero ran a story titled “Puerto Rico's bankruptcy will be prolonged” in which they explained the reasons why the government will stay under Title III of PROMESA. This section of the federal law that was created in 2016, allows the territorial government to file for bankruptcy in order to not pay the creditors of its public debt which now reaches $70 billion.

 

It was precisely on May 1st of 2017 that then governor Ricardo Roselló asked the Financial Oversight and Management Board for the protection afforded to the government under Title III for important debt issuers, amongst them COFINA, the central government’s obligations, the Government Development Bank for Puerto Rico, and the Puerto Rico Highway and Transit Authority.

 

Over $50 billion of the government’s financial obligations ended up being protected under PROMESA, the same law that local populist politicians criticize, even when it has allowed them to not pay their debtors under previously agreed-upon terms. The problem isn’t the temporary protection that PROMESA provides the government as an essential component of the restructuring process, but rather the comfort that it provides and the apparent desire to stay within it.

 

 

It’s clear that the political class is beginning to enjoy the convenience of not having to pay our debt, and to continue spending on contracts and other non-essential expenses. The Oversight Board, having not defined which expenditures are essential during the bankruptcy process, has allowed this state of comfort from which it will be difficult to exit.

 

Before this summer explosive political crisis, the administration’s posture under the previous governor was to drag their feet within the restructuring process. The clashes between the government and the Fiscal Oversight Board surrounding the fiscal plan and other subjects were a way of delaying the implementation of PROMESA, including the structural reforms and other issues regarding the fiscal governing of this bankrupt territory.

 

The plan was to not reach any agreement until the 2020 elections had passed, in order to secure the reelection of the governor and avoid unnecessary risks, such as cuts to pensions and other unpopular austerity-based decisions. Legal conflicts have been inflating the already millions of dollars spent on legal fees and could possibly make this the most expensive federal bankruptcy ever witnessed.

I think it is outrageous to attach political goals to this bankruptcy, and to see electoral interests prevail over the long-term well-being of Puerto Rico.

 

The problem with this electoral calculus is that the longer we wait to take the decisions and reforms necessary to take this island out of bankruptcy, the greater the negative effect on the economy that we will witness and the harder that the path to recovery will be. The actual state of government bankruptcy increases uncertainty when it comes to business on the island, discourages new private investment, and even worse, maintains capital markets closed to us. These markets were closed in 2014, after credit rating agencies degraded Puerto Rico’s credit standing.

 

When PROMESA was passed in 2016, it was not expected that there would be a perpetual state of bankruptcy so that the government and its politicians could indefinitely stay in their comfort zone. Rather PROMESA was supposed to provide temporary protections until the Fiscal Oversight Board could restructure the debt and important fiscal and structural reforms could be implemented.

Ironically, the government has embraced the protection afforded it by PROMESA’s title 3 but has rejected the implementation of less friendly aspects of this federal law associated with spending cuts and fiscal discipline.

 

The result has been that heading into 2020, this fiscal clean up project finds itself stuck and with few encouraging short-term opportunities.

 

Meanwhile, the economic bubble created by the initial injection of federal funds to mitigate the impact of Hurricane María is beginning to deflate, and the economy is beginning to show signs of weakness. Amid this chaos and local ungovernability, the White House has frozen reconstruction funds. Likewise, international Banks and firms have decided to pack their bags and leave the island, having not seen any certainty in the short-term future of the local economy.

 

Heading into the 2020 electoral cycle, we must demand concrete answers from all the candidates, but more importantly, we must demand that they take firm decisions to end the island’s bankruptcy, fulfill PROMESA, and execute a coherent economic reactivation program. The time for empty slogans is over, it is time to take our island’s future seriously.

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