Puerto Rico Board Delivers Bad News; Governor Says 'No'

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The Puerto Rico Oversight Board met with opposition from the territory's governor, who said he wouldn't cooperate in a fiscal plan that requires more sacrifice from citizens and doesn't entail financial help from Washington.

On Friday board members said that the solution to the islands' problems includes deep government spending cuts and structural changes. None of the seven members emphasized the importance of paying the island government's debt, and one member called for a deep haircut -- or reduction in principal repayment.

Friday's session was the third for the board, and the first to be held on the island, as it continues on its mission to guide Puerto Rico's government in restructuring almost $70 billion of debt and restoring economic stability.

Several board members said that substantial federal aid was either unlikely or impossible.

While the board's approach may or may not aid in debt payment and economic recovery in the long-term, it signals that at least the next few years will be difficult for bondholders and island residents.

The members implicitly and sometimes explicitly rejected the fiscal plan presented by Gov. Alejandro García Padilla in mid-October. The governor had said the government had cut its spending for years and there was little room for further cuts. He said Puerto Rico couldn't afford to pay any debt service in the next 10 years unless it got help, including additional money, from the federal government.

Board member Ana Matosantos said that "deep" debt restructuring was necessary but that additional reforms and spending cuts were necessary. She said that federal assistance was unlikely and that without it, there would have to be an additional $16 billion in spending cuts "before you pay a dime of debt service."

Board member Andrew Biggs also said the board must come up with a package that didn't assume a federal bailout. In cases of sovereign debt crises, most attempts to turn the situation around fail because they don't look at the "big questions," he said. The successful turnarounds question the existence of the big social programs.

"I think it is very clear that help is not coming and that we have to solve this problem by ourselves," said board member Carlos García.

Board chairman José Carri-n III said he didn't think Puerto Rico would get all the governor was asking from the federal government, particularly regarding healthcare. The board must come up with multiple scenarios. It must be bold and use the plan to encourage economic growth.

The board set up a timeline to create an adopted fiscal plan. Nov. 23 is to be the last date for a comment from stakeholders. In the weeks of Nov. 28 and Dec. 5, the board will meet for work sessions on the plan. In the week of Dec. 15 the board will expect a revised version of the plan from governor. The board will meet at some point in the week of Dec. 16 to consider the revision.

The board plans to do a final certification of the plan by Jan. 31.

On Monday Gov. García Padilla released a statement saying that the board is failing to adapt its prescriptions for Puerto Rico's depression conditions.

What the board is advocating would require "aggressive spending cuts" leading to government employee layoffs. While the board may request the governor revise his plan, "once the written notice is received requesting changes to the fiscal plan, we will be notifying them that the plan will not be amended to add austerity…. What the board suggested would inevitably put our economy in an … economic death spiral."

The governor said that as long as he remains governor (until Jan. 2, 2017), he would oppose layoffs, reductions of retiree pensions, and attacks on the University of Puerto Rico. Puerto Rico Governor-Elect Ricardo Rossell- has said he supports a 10% cut in government spending.

U.S. Treasury Secretary Jacob Lew, in a Nov. 16 letter to the board, largely aligned himself with the governor's approach and against what appears to be the developing board approach.

"Do not unduly rely on fiscal austerity," Lew advised, as it would be "self-defeating." The governor's "proposed fiscal plan's adequate funding for vulnerable constituencies and the delivery of essential services are both critical. In addition to providing support to the economy, these efforts can also help to curb outmigration and preserve the tax base, both vital to stabilizing fiscal balances and lifting GDP over the medium-term."

Lew suggested that the governor's plan may be overly optimistic about economic growth. He indicated that the solution may an even bigger haircut for debt holders. Since Puerto Rico right now is offering $0 for bondholders without federal help over the next 10 fiscal years, it is unclear how this would work.

Lew told the board to "work with Congress to enact urgently needed legislation," echoing the governor's call for various forms of federal aid.

According to the Puerto Rico Oversight, Management, and Economic Stability Act, if the governor declines to submit a revised fiscal plan that responds to the board's directions and requests, the board can create its own plan and submit it to the governor. This plan would be considered "approved by the governor" whether or not the governor actually supported it.

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