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Economist Martín Guzmán. (Teresa Canino )

"This is not an agreement generating savings for the economy of Puerto Rico," said yesterday economist Martín Guzmán -an expert in debt restructuring- when assessing the implications of the debt adjustment agreement for the Sales Tax Financing Corporation (Cofina, Spanish acronym).

The Columbia University researcher warned that, although for the government it is positive that the agreement includes a 32 percent cut to the $ 17.6 billion principal, it hides the issuance of "some tricky bonds" that will rise interest payments to $ 32.3 billions in 40 years.

"In 2044, $ 14.3 billion will still be owed," he said.

Guzmán - who collaborates with the non-profit Espacios Abiertos (EA) (Open Spaces) in the analysis of the Puerto Rican public debt crisis - made the statements facing the hearing scheduled for tomorrow, when federal judge Laura Taylor Swain will decide on the adjustment plan between the government and Cofina bondholders.

If Swain, who presides over the bankruptcy proceedings under PROMESA, ratifies the agreement, the Treasury would begin with the payment of $ 420 million to Cofina bondholders this year.

"Savings in terms of present value end up being very low or null", insisted Guzmán, who is a close collaborator of Economics Nobel laureate Joseph Stiglitz.

For Guzmán, public debt and finance instrument issues are so complex that is very hard to explain people how agreements such as the one for Cofina can impact their lives before they start suffering the effects.

"For people who suffer a direct cut in their income, as in the case of pensions, it is easy to see the problem. For the rest, the effect is indirect and very, very large," he lamented and added that they “have fewer opportunities, a low-income economy and it affects their day to day lives."

As for Puerto Rico, the scenario gets complicated because "there is less incentive to fight, because people can leave very easily," he said regarding the mass emigration that reduced the Puerto Rico´s population to 3.2 million people and warned that without a timely and well thought out resolution to the debt crisis, which is not a short-term remedy, this spiral of emigration and contraction could only get worse.

"What Puerto Rico is exposed to, is to become a country for a few people, with an elite that will live well and a middle class will have to follow their dreams in other places or accept that those dreams of personal and family growth cannot be fulfilled here," said Guzmán, who as an Argentine experienced first-hand the effects of debt crisis in a society, especially when taking measures of significant cuts in public spending.

Meanwhile, Cecille Blondet, EA executive director, warned that the agreement to restructure Cofina will be analyzed in court without the government or the Board having made an analysis regarding how much can be paid off without falling back into another default or without deepening the economic crisis.

"If they did the analysis, nobody has seen it," she said. Furthermore, before the lack of this debt sustainability study, according to a report that EA published in 2018, both the government and the Board continue to pay “millions of dollars in contracts to consultants, some of whom we know are bondholders," denounced Blondet.

Even so, she recalled that in November the Legislature and Governor Ricardo Rosselló Nevares approved Law 24-12018 on the agreement "without the participation of the people, without public hearings".

Before this scenario, Blondet compared the possible ratification of the Cofina agreement to the legendary Titanic, that is a ship that had limited-capacity lifeboats and Puerto Rico, that has limited resources to fund essential services such as keeping hospitals running, paying pensions, teachers and Police payrolls.

Blondet said that paying Cofina without fully knowing how much can be paid and the total debt relief required is like evacuating without knowing the number of passengers, how many people could go on the boats and, even worse, how many would be left behind.

Impact on other bondholders

Guzmán warned that the Cofina agreement, if ratified, "sets a dangerous precedent" because it consumes practically all the resources that the government could reasonably use to pay off debt without further sinking the economy.

 “If general obligations (GO's) bondholders wanted a similar agreement, “Puerto Rico would default again," anticipated Guzmán based on the grounds that his analysis and all the third-party reports he consulted show that the Treasury does not have enough resources to repay between 80 percent to 90 percent of its $72 billion.

In contrast, Cofina's adjustment plan assumes that bondholders will recover an average of 75.5 percent.  For Guzmán, if they reached a similar agreement with GO bondholders, the economy of Puerto Rico would be ruined.


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