'What the Board is Proposing is to Kill the Country'
Puerto Rico must be clear that debt negotiation does not mean the end of the crisis, but only the first of many steps that must be taken toward economic development and that this can divert into a relapse of the crisis.
According to Martín Guzmán, economist and foreign restructuring expert hosted in Puerto Rico by the Center for a New Economy, debt restructuring is merely a necessary condition to provide the space for the government to establish the necessary policies that will lead to economic growth and increase demand.
In that sense, the key to effective restructuring is an economic development plan focused on generating the conditions for growth. Such a plan should firmly reject any austerity proposal, should not focus on returning to financial markets and should not satisfy the desires of creditors.
Guzman noted that so far there is no indication that the Fiscal Control Board (FCB) wants to act in a transparent manner, taking into account that they have issued figures based on assumptions that could be more optimistic than they actually are alongside with austerity measures that could be considerably damaging for the country. Even the Board recognizes that its initiatives would lead to a Gross Net Product conraction of 16.2%, a very alarming figure for the economist.
'What the Board is proposing is to kill the country. He who is dead cannot pay his debts. In order to recover sustainability Puerto Rico needs to grow again. So if the Board works constructively with the government of Puerto Rico, they shouldn't be saying that this is the minimum payment that we're going to accept and that this will imply that 16% drop,' said the economist.
Even so, Guzman pointed out that citizen's resistance to these measures can have a positive effect on the negotiation process, since it puts pressure on political powers, an element that creditors have to take into account or face setbacks in the restructuring process.
The objective of any debt restructuring process should be to create the conditions for the country to have a sustainable debt that allows for economic growth. According to Guzmán, reestablishing economic growth leads confidence building and to attraction of investment.
However, the path of voluntary negotiation with creditors to achieve restructuring requires the sharing of knowledge with all parties, because more powerful creditors commonly seek payment priority and conditions that would affect other creditors' position and create an imbalance in the process. This tends to be the case with those creditors who buy outstanding bonds, better known as vulture funds, whose intent in obtaining that kind of debt is to litigate for a higher return value.
'Voluntary or decentralized negotiation is very dangerous. For a voluntary negotiation you need 100% alignment of all parties with the measures needed to solve the underlying problem and that is very difficult to achieve,' explained Guzman, who also warned that the elimination of statutes that prohibit financial institutions from buying debt for the purpose of litigation, such as the Champerty Act in New York state, tends to favor predatory behavior against sovereign nations.