Next year, when the Oversight Board approves a new plan to balance the budget of Puerto Rico and renegotiate with bondholders, it must start from two realities: that the current public debt will have to be -in essence- canceled and that any restructuring negotiated with the bondholders must be tied to economic recovery.
In a letter sent to the entity created by the PROMESA law that controls the public finances of Puerto Rico, the economist and student of debt restructuring processes Martín M. Guzmán said that, as a result of the ravage caused by hurricane María, "the totality of the public debt would have to be erased from the books - that is, canceled or thrown away - in order for the Island to return to a sustainable position that lays the foundations for its economic recovery.
"The only way that Puerto Rico can pay something to its creditors - even if it is a small amount in a distant future - is through economic recovery," Guzmán said in a letter sent to the Board on December 6.
Guzman's letter, who co-chairs of the Initiative for Policy Dialogue (IPD) of Columbia University, is addressed to the executive director of the Board, Natalie Jaresko, who asked the academic to participate in the dialogue sessions regarding the Puerto Rico fiscal plan. The aim of the sessions was to listen to the proposals of experts in demographic, tax and economic issues, as well as business and union leaders, for the preparation of the new fiscal plan that must be approved by February 2018.
In his letter, Guzmán stressed that the mere restructuring of the public debt will not be enough for Puerto Rico to channel its economic recovery.
However, the academic stressed that, "if the public debt of the territory is not properly renegotiated, no new (economic) growth strategy will be viable."
María and the public debt
Guzmán has been dedicated to the analysis of the debt of Puerto Rico for more than a year, after the Center for a New Economy (CNE) entered an agreement with the IDP, headed by Economy Nobel Laureate Joseph Stiglitz, with the expectation of identifying a development agenda for the Island.
"My preliminary calculations indicate that, after Hurricane Maria, the total public debt will have to be eliminated," said Guzmán.
Guzman's statement regarding the state of the public debt after Maria is not arbitrary: before the hurricane hit Puerto Rico on September 20, the academic had dissected the fiscal plan that the Board was seeking to implement last August.
And, according to Guzmán, the fiscal plan certified last March - which Governor Ricardo Rosselló Nevares claimed as a success - is plagued by errors and assumptions that underestimate the impact of the austerity program that was contemplated, as well as the projections that Puerto Rico could never meet.
According to Guzmán's estimates, the March fiscal plan highly underestimated the impact that the policies of cuts and structural reforms would have on the Island's gross product.
Above all, for Guzmán, the economic projections of the fiscal plan that predicted positive numbers after the adjustment were "over-optimistic", when contrasted with the scientific literature on the subject.
Guzman's analysis indicates that, if the fiscal plan does not provide a substantial reduction of the current public debt, as from 2027, Puerto Rico would be obliged to have "permanently" fiscal surpluses of between 3.5 percent and 7.4 percent of the gross product.
"An objective like that is economically and socially unviable," says Guzmán in his letter to the Board.
A 90 percent cut
That is to say that in the view of Guzmán, before María left Puerto Rico with no possibility of paying bondholders, the Board and the government would have had to convince Judge Laura Taylor Swain to approve a cut of not less than 65 percent or 84 cents in all the current public debt so that the numbers of the fiscal plan certified last March were reached.
Guzmán's proposals are in stark contrast with the arguments of creditors in Title III cases before Swain. In essence, the creditors are convinced that, by making certain adjustments, the government of Puerto Rico can pay them, even if it is the interest rate.
Moreover, Guzmán warned Jaresko that, if the Board used "more realistic" projections to cut all of the $ 72.2 billion owed, it would have to fight for a cut greater than the 70 percent to 90 percent range in the debt for Puerto Rico to have a sustainable structure and consider a payment structure similar to the "growth" bonds.
Payment variants with this type of structure have been applied, for example, in Ukraine, Bosnia and Costa Rica, and they start from the premise that the debtor will pay as its economic conditions improve.