The Puerto Rico government's
The plan, released Wednesday, offers revenue and expense estimates for both negative 1% annual economic growth rates and positive 2% annual economic growth rates in the next five fiscal years. In the former case the government would have $2.2 billion to spend to cover $18.2 billion in debt service, or 12%. In the latter case the government would have $4.1 billion to spend to cover the same amount of debt service or 23%.
On Tuesday night in a news teleconference a government advisor said the government might have as much as $5 billion for about $18 billion in debt service in the next five fiscal years, which would mean the government would pay 28% of debt service.
The plan to reduce debt payments is part of a wider Puerto Rico Fiscal and Economic Growth Plan requested by Gov. Alejandro García Padilla in July, after he said the commonwealth's $72 billion of debt was unpayable unless economic conditions improve.
"While the Puerto Rico plan is comprehensive, Moody's believes the commonwealth's ability to implement many of the recommended policies will pose political challenges," Moody's vice president Ted Hampton said in a report Wednesday. "It is unlikely that holders of the many Puerto Rico bonds will agree to forgo or defer substantial sums of promised principal and interest. There is a high probability of protracted litigation, particularly on the part of investors holding general obligation or other securities with strong legal protections."
García Padilla also talked about the possibility of law suits in a speech Wednesday afternoon. "Only a comprehensive debt restructuring with the participation of creditors will return us to a sustainable path of economic growth. As we have done successfully with Puerto Rico Electric Power Authority, I ask all sectors to give this process space," the governor said. "If creditors are not willing to partake in this process, Puerto Rico will have no alternative but to proceed without them. That path suits neither us nor them and would result in years of litigation and defaults and a major humanitarian crisis. It would force us to choose between paying a creditor, a teacher, a policeman, or a nurse. This is a decision I'd prefer not to make, but I will make it if I have to — always looking out for the best interests of our commonwealth."
In a presentation to English language news outlets Tuesday evening, Puerto Rico officials didn't discuss what would happen after the first five fiscal years. However, they said they had examined and confirmed the financing gaps for the first five fiscal years that were identified in June in the so-called Krueger Report on the island's financial and economic situation. The authors of the report — Anne Krueger, Ranjit Teja, and Andrew Wolfe — said that even with major revenue and expenditure measures there would be major deficits. The current fiscal year would be expected to have the biggest fiscal deficit. A deficit this fiscal year of about $2.5 billion could be expected to gradually decline to $0 in fiscal 2024.
Before taking any additional measures, the government is facing a cash deficit of $28 billion in the next five fiscal years, the Puerto Rico government advisor said. In discussions Tuesday, the government officials presented various measures to address this cash deficit that had been developed by the Working Group for the Fiscal and Economic Recovery of Puerto Rico.
The group consisted of the governor's Chief of Staff Victor Suarez, Government Development Bank for Puerto Rico President Melba Acosta Febo, Secretary of Justice César Miranda, and the chiefs of staff to the presidents of the Puerto Rico Senate and House of Representatives.
Even assuming the adoption of all the plan's measures, the government would still face an $18 billion shortfall in the next five fiscal years, a Puerto Rico advisor said.
The advisor said Tuesday night's discussion of debt covered all of Puerto Rico's debt with the exception of that of the Puerto Rico Electric Power Authority and the Puerto Rico Aqueduct and Sewer Authority. He said that there was a total of $47 billion of debt principal being discussed. The advisor explicitly mentioned the general obligation and Puerto Rico Sales Tax Corp. (COFINA) debt as being on the table for restructuring.
The government has started discussions with its creditors, who have organized themselves by the type of debt they hold and hired professional advisors, the advisor said.
However, the first step now is for the Puerto Rico legislature and the United States Congress to consider the measures and requests found in the plan, the Puerto Rican officials said. Once these measures pass, the government and its creditors will know where the government will stand in the future financially and can start to negotiate, they said.
While the government has some liquidity hurdles in the end of this calendar year, it has major ones in May and June, the end of the current fiscal year, officials said.
The advisor said that Puerto Rico is hoping for the federal government to give it a way of legally organizing a bankruptcy process.
Puerto Rico has to lower its debt and its plan is comprehensive, said Peter Hayes, head of the municipal bond group at Blackrock. "They've recognized how dire the situation is and the need for change and that is a positive," he said. "The only question is how much they will be able to implement to have a positive impact on their economy going forward."
Hayes said he thought the Puerto Rico legislature understood the difficulty of the government's situation. While the legislature will probably make some counterproposals most of the plan's measure will probably be passed, he said.
In Washington, the federal government will probably look at some of Puerto Rico's proposals favorably, Hayes said. For example, Puerto Rico's requests to increase Medicare and Medicaid funding may be passed.
It will difficult for Puerto Rico to lower its debt, Hayes said. The effort to do so may trigger a battle between holders of general obligation and Puerto Rico Sales Tax Finance Corp. (COFINA) bonds. Puerto Rico may have to institute a moratorium on debt payment as soon as Jan. 1.
While the plan may not be to the liking of bondholders, Advantage Business Consulting president Vicente Feliciano said, "There shouldn't be any surprise since it follows the general guidelines of the Krueger report."
In the last seven years, Puerto Rico governments have focused on spending and revenues; this plan uses a more holistic approach by also addressing the economic and institutional framework and "as such it is more in tune with the needs of Puerto Rico," he said.
Puerto Rico needs economic growth, and the plan recommends needed labor reforms that would contribute to this, Feliciano said.
The plan also addresses what the federal government needs to do, he said: provide Chapter 9, give the island Medicare parity, and repeal the Jones Act to lower product costs, among other things. The federal government needs to give Puerto Rico the tools to deal with its problems.
The plan also recognizes the need to invest in the commonwealth's infrastructure if the economy is to grow, Feliciano said.
