Fiscal planning, law, and

citizenship: Puerto Rico's

debt restructuring
Overview

▪ Puerto Rico’s Political Status

▪ The Economic Decline and Fiscal Crisis
▪ PROMESA and the Federal Oversight Board
▪ After Hurricane Maria
Puerto Rico’s Political Status

▪ US Commonwealth - Territory
▪ Residents are US Citizens
▪ But Puerto Rico is treated different to states in terms of funding
▪ Puerto Ricans can’t vote for US elections while on the island
▪ US decides on trade and monetary policy
▪ PR has very little policy space
Economic Decline

▪ Puerto Rico’s economy was growing in 80s and 90s

▪ Island was manufacturing hub for US companies
▪ Some of the things that happened since the 90s:
▪ NAFTA
▪ WTO
▪ China joining WTO
▪ Tax incentives phased out for Puerto Rico
Economic Decline
Economic Decline
Economic Decline
Economic Decline

▪ Between 2005 and 2016 economy shrank by 13 percent

▪ Poverty rate in 2016 was 46 percent, and 58 percent for children
▪ First wave of austerity measures started around 2009:
▪ Government consumption dropped from 9 to 7 percent of GDP
▪ About 70,000 public sector employees were laid off
The Fiscal Crisis

▪ As the economy shrank, so did government revenue

▪ So, the government started to borrow to cover the gap
▪ Due to political status bonds were “triple-tax exempt” (local, state, federal)
The Fiscal Crisis
The Fiscal Crisis

▪ In 2014 the bonds were downgraded

▪ Institutional investors limited exposure
▪ Hedge funds bought large amounts of bonds at steep discounts
▪ In 2015 PR declared debt unpayable but had no legal means for bankruptcy
▪ US Supreme court struck down PR attempt at passing its own bankruptcy law
PROMESA

▪ US Congress responded and drafted a bill to address the situation

▪ Puerto Rico Oversight, Management and Stability Act (PROMESA) became law in
2016
▪ It created the Financial Oversight and Management Board of Puerto Rico (the
Board)
▪ The Board is tasked with certifying a 10-year Fiscal Plan that makes all fiscal
policy decisions
▪ The Board is also tasked to either reach consensus with creditors, or handle
bankruptcy proceedings in court
▪ The court procedures were modelled after municipal bankruptcies
First Fiscal Plan

▪ In March 2017 the Board certified a 10-year austerity plan

▪ The plan proposed spending cuts of almost $26 billion, along with revenue
increases of almost $14 billion
▪ The plan made almost $8 billion available for debt repayment
▪ Creditors rejected the deal so the case moved to court
Hurricane Maria

▪ Devastated the island on September 20th 2017

▪ Estimated damages are around $95 billion
▪ Initially prompted for debt forgiveness calls – leading to another sell-of in bonds
▪ Support over next 5 years is about $62bn ($54 bn from federal government)
▪ Expectations of relied funds then drove bond prices up – “investment of the
year”
After Hurricane Maria
The New Fiscal Plan

▪ Somehow finds more money for creditors than previous plan

▪ The surplus would be about $6.1 billion over six fiscal years (higher than the
$4.5 billion surplus for this period in the first plan)
▪ Continues same austerity approach for people
The New Fiscal Plan
The New Fiscal Plan
The New Fiscal Plan

▪ Attacks labor rights and blames them for the problems in the economy
The New Fiscal Plan

▪ The Board estimates that its structural reform agenda will more than offset
austerity’s drag on economic growth
▪ These estimates are not realistic
▪ The reforms are modelled after what the IMF did in Europe
▪ So proven track record is underestimating negative feedback
Debt Restructuring

▪ The estimates from the Board will be used in court

▪ The decision on what will happen to the debt is now in the hands of a NY
Federal Judge
▪ The judge has hinted support for initiatives to audit the debt
▪ As of now those who profited from situation were debt underwriters, and
consultants that cashed in billions
Summing Up

▪ Puerto Rico’s colonial status means it has no say in what is happening

▪ The debt crisis cannot be separated from the political status
▪ Austerity will worsen the situation on the island
▪ The debt is not sustainable
▪ An audit of the debt is also necessary
▪ Likely outcome: continued downward spiral of outmigration and economic
decline