Mistake to pay off debt with surplus funds

The Fiscal Plan that was drawn and certified by the Fiscal Control Board (FCB) proposes a debt repayment of more than $70 billion, based on the expected success of the structural reforms and the surplus from the federal funds that have kept coming into the island since Hurricane Maria.

Nevertheless, this assumption is more dangerous than beneficial for Puerto Rico’s recovery.

According to international public debt expert Martín Guzmán, the surplus funds that have been projected for the next six years in the new version of the document (which was approved last week) are born from excessively optimistic expectations.

He believes that using these funds on anything other than rebuilding after the storm would put a stop to Puerto Rico’s economic development.

‘If instead of disbursing these funds to help Puerto Rican society recover, a big portion of this money is used to pay off the debt, it would end up in the hands of the bondholders. This would be an implicit bailout to the bondholders, because [Puerto Rican] bonds have been going up instead of down after the hurricane,’ Guzmán assured during a press conference.

‘If we do that and the projected growth fails to happen, which is the likelier scenario, we will have the same problem again. We have remained in a destabilizing social dynamic, we keep wasting time, and the people keep suffering the consequences,’ added Guzmán, who is also an economist at Columbia University.

In his Build Back Better report, Governor Ricardo Rosselló Nevares asked the US Congress for no less than $94 billion for infrastructure reconstruction and assistance programs.

However, the FCB’s certified Fiscal Plan assigned $62 billion in funds for disaster recovery at a federal and private level.

Another mistake Guzmán noticed in the FCB’s Fiscal Plan, based primarily on the government’s statements, is that they are overestimating the income capacity of the structural reforms.

These include the controversial Labor Reform, which would eliminate the Christmas bonus and cut back on vacation and sick leave days.

Given this scenario, Guzmán is a proponent of delaying any debt repayments until the island shows positive economic growth and restructures the public debt.

All things considered, the amount to be paid by the government should not be greater than what was intended before Hurricane Maria, which is discussed more in depth, among other details, in his ‘Analysis of Puerto Rico’s debt relief needs to restore debt sustainability’.

This analysis was jointly conducted by Guzmán along with Pablo Gluzmann and Nobel laureate in economics Joseph Stiglitz, and it was published in January by the organization Espacios Abiertos.

‘There’s still a chance that the federal assistance may end up in the hands of the creditors. Something will end up in creditor hands, but ultimately, what would make sense is to calculate how much we would have been able to pay before the hurricane and avoid paying more than that amount,’ Guzmán noted.

After presenting this analysis, Guzmán warned that the debt was already unsustainable, and that restructuring it would be essential in any case.