Time is of the essence: Puerto Rico needs bankruptcy protection. Now.
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The last thing that Puerto Rico now needs is yet another shock to its very troubled economy. Yet, that is precisely what the island should be bracing itself for once the temporary stay that the U.S. Congress afforded it last year from creditor lawsuits expires on May 1.

For which reason, it is all the more difficult to understand why Puerto Rico’s governor and its Oversight Board have not already availed themselves of the island’s right to file for bankruptcy protection that was made possible under last year’s PROMESA Act of Congress.

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It is difficult to overstate how desperate the present state of the Puerto Rican economy is. In each of the past 10 years, its economy has been contracting, and it is now more than 10-percent smaller than it was in 2006. Over the same period, more than 10 percent of its population has left the island for the mainland and its unemployment rate has risen to over 12 percent of its workforce.

 

Even before the slew of costly and disruptive creditor lawsuits that will almost surely follow the expiry of the U.S. Congress’ temporary stay on such suits next week, the island’s economic outlook was nothing short of grim. According to the Puerto Rican government’s own 10-year budget plan, which was approved by its Oversight Board, the island’s economy is projected to decline by more than 3 percent a year in 2018 and 2019 and by around 10 percent over the next five years.

It would do so as it engaged in a long-run program of major budget belt-tightening within the constraints of a monetary union with the United States that denies the island its own interest rate or exchange rate policy.

In these dire circumstances, one would think that it was in the island’s best interest to secure as soon as possible an orderly restructuring of its public debt mountain. If such a restructuring were quickly done in the context of a far-reaching structural economic reform program, especially one that included reforms to its archaic labor laws, the island would have a chance to at last begin recovering from its deep economic depression.

By orderly restructuring its debt, the island would reduce the investor uncertainty from which it now suffers as a result of a debt level that everyone knows it cannot afford to pay.

There are two basic reasons why it is fanciful to think that a Puerto Rican debt restructuring might be achieved in a voluntary manner as the island’s governor and its Oversight Board seem to believe. The first is that the island has a highly-complex debt structure with more than 18 separate debt issues. 

Further complicating matters is the fact that many of these issues have claims to different streams of government revenues or of utility earnings, while some of these issues have Puerto Rican constitutional protection. It is difficult to see how Puerto Rico can possibly get voluntary agreement among its disparate creditors as to the relative seniority of their debt claims outside a court-ordered bankruptcy proceeding.

The second reason that a voluntary restructuring seems implausible is the very size of the losses that are likely to have to be borne by the creditors. In this context, it is striking that in Puerto Rico’s recent 10-year budget plan, which had the approval of its Oversight Board, the island would only make around one quarter of the debt service payments falling due over the next 10 years.

It is difficult to believe that the creditors would voluntarily accept the very large haircut to their debt claims that is implied by the island’s long-term budget plan.

To paraphrase Shakespeare, if Puerto Rico’s court-ordered bankruptcy were to be done, it were best be done quickly. For which reason one has to ask why, if a court-ordered bankruptcy is indeed inevitable given the island’s desperate economic and social circumstances, has Puerto Rico’s governor and its Oversight Board not already triggered Title III of the PROMESA Act?

This would especially seem to be the case considering that Title III would afford the island with the same bankruptcy protection from creditors as Chapter 9 of the U.S. Bankruptcy Code.

 

Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.


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