Puerto Rico’s exit from bankruptcy requires political leadership
When Puerto Rico descended into bankruptcy three years ago with more than $100 billion in debt, the island faced a long road to recovery. Fortunately, the exit from bankruptcy—and a brighter future for three million individuals—is now in sight. Gov. Wanda Vázquez Garced just cannot try to block the offramp.
The federally established, bipartisan board tasked with leading Puerto Rico back to financial health announced recently that it reached a landmark debt restructuring agreement with major creditors. The terms position the commonwealth to reduce its central government debt from $35 billion to $11 billion and maintain $15 billion in cash upon exiting bankruptcy. The timeline for debt repayment will also drop from 30 years to 20 years, resulting in further savings of nearly $5 billion on the back end.
This is an excellent deal for Puerto Rico and its people by any measure. In a day and age when compromise is so evasive, the commonwealth’s highest-priority bondholders are accepting material haircuts. Overall bondholder haircuts will average out at nearly 60%, representing cuts that are dramatically steeper than the board’s proposed reductions for the top pension recipients.
Although not perfect, this is the type of deal that members of Congress envisioned when we authored the Puerto Rico Oversight, Management and Economic Stability Act in 2016. The legislation’s primary objectives were to reduce debt in a lawful manner, lay the groundwork for an economic recovery, and restore the island’s capital markets access over time. The restructuring plan checks all the boxes.
While the new $35 billion restructuring framework was dismissed by the governor due to concerns over modest pension reductions, it’s important for her and other elected officials to take the time to closely evaluate the deal’s core tenets and numerous benefits.
Gov. Vázquez Garced's focus on preserving pensions is valid given the number of pensioners living in Puerto Rico, but the fact is that the new settlement doesn’t undermine her goal. The deal makes clear that neither federal funds nor monies earmarked for pensioners and essential services will go to bondholders. In fact, I believe by reducing debt service to manageable levels and putting the island on sound financial footing, the deal supports the governor’s objective of maintaining affordable pensions for all citizens over the long-term.
It shouldn’t be overlooked that the board’s current stance would not even impact roughly 92% of pension recipients. Moreover, the top 8% of pensioners who may receive small reductions will still make out better than all creditors, which is an anomaly in debt restructurings.
As PROMESA’s sponsor and someone who has spent a great deal of time in Puerto Rico focused on recovery efforts, I can honestly say that the compromise between the board and creditors is one to rally around. It provides the governor with a great opportunity to lead the island forward toward a more prosperous and stable future.
The next few months will be key as the recently announced deal evolves into a new plan of adjustment that must be filed in court and confirmed by the judge presiding over Puerto Rico’s bankruptcy cases. Rather than allowing remaining divisions to get in the way during this period, the board and the local government should collaborate on solutions and concrete steps that can be taken to spark capital formation and new investments upon emergence from bankruptcy.
Every month that Puerto Rico remains in its current situation is another month of stagnation for an island that has such tremendous potential. Recent data from the Census Bureau underscores the painful costs of steady outmigration and rising poverty rates, further reinforcing the need for urgency.
I firmly believe that the agreement is the basis of sound public policy and a confirmable bankruptcy exit plan. Puerto Rico can begin to see the impact in a matter of months rather than years. Let’s just make sure election-year politics in Washington and San Juan don’t get in the way.
Sean Duffy is a former member of the U.S. House of Representatives, representing Wisconsin's 7th district. He was the lead sponsor for PROMESA, which was passed and signed into law in 2016.