Puerto Rico Gov. Alejandro García Padilla released more pessimistic figures for the next 10 years and said they were added evidence that a negotiated debt solution was impossible.
On Tuesday evening the governor released a new projection of the commonwealth's financial shortfall over the next 10 fiscal years, estimating it to be $8.8 billion worse than the commonwealth's mid-October projection.
In mid-October the governor and his team submitted a 10-year fiscal plan to the Puerto Rico Oversight Board. In this plan the government calculated the shortfall if the government didn't change any of its policies, scheduled revenue and spending measures occurred, and the government paid all its scheduled debt service.
The October scenario didn't claim to be a viable scenario because it never explained how the government would continue to operate with very large deficits and without the ability to borrow to cover them.
The October plan found that in this artificial scenario, called the "Base" or "Baseline" projection, Puerto Rico would be short $58.7 billion.
In the revision released on Tuesday the government now projects the figure at $67.5 billion. Tuesday's revision is different in that the government now assumes that Puerto Rico makes the cuts in spending. The revision says the government would have to cut $67.5 billion in spending to come out even at the end of fiscal year 2026.
Not paying the debt holders would not solve Puerto Rico's problem in this scenario since the commonwealth is scheduled to pay $35 billion in debt service over the next 10 years.
Whereas the October baseline didn't assume Puerto Rico's government fiscal crisis would have a negative economic impact, the new baseline estimate attempts to calculate the impact. The new baseline projects government spending cuts would lead to a more negative nominal gross national product trajectory over the next 10 years. The government says the baseline projection would lead to an average annual nominal GNP contraction of 1.03% rather than an average annual nominal GNP growth of 0.08%, as had been assumed in the October fiscal plan. The revised assumptions about economic growth and inflation add $3.4 billion to the new baseline compared to the October baseline.
The second biggest addition to the 10-year gap was due to the commonwealth's historically optimistic projections of expenses. Because Puerto Rico has generally been overly optimistic about expenses in the past, Tuesday's projection assumed that its expense projections continue to be optimistic. This leads to an expansion of $3 billion of the October Baseline deficit.
In the new baseline scenario in the 10 fiscal years through the end of fiscal year 2026, Puerto Rico projects there would be $232 billion in government expenses and $165 billion of government revenue. The difference of $67 billion would be bridged through cuts.
The new projection doesn't specify where the government would make the cuts.
The Puerto Rico Oversight Board has begun discussions with creditors aimed at achieving a negotiated and consensual debt cut under Title VI of the Puerto Rico Oversight, Management and Economic Stability Act.
On Tuesday García Padilla's press office put out a press statement saying the governor's "estimate of a $67 billion deficit over the next 10 years shows that a comprehensive restructuring under Title III of PROMESA is inevitable." Title III deals with a court-overseen debt restructuring.
The governor said that the board's attempt to renegotiate the debt using Title VI is unrealistic given the size of the problem.
PROMESA has suspended the rights of creditors to sue for debt nonpayment until Feb. 15. "If Puerto Rico does not seek Title III protection before the termination of the claims on February 15, 2017, the government will run out of money and essential services will be severely affected," the governor's office said.
If the board requests an extension of the stay, it could continue to May 2.
