Alex Pollock, a former colleague of mine, never tires of repeating his dictum that if a debt cannot be repaid, it will not be repaid. Wednesday’s application by Puerto Rican Governor Ricardo Rossello for bankruptcy protection for the island under the provisions of the PROMESA Act underlines how true Pollock’s debt dictum has proved to be in the case of the heavily over-indebted Puerto Rican economy.
One must now hope that wise use will be made of the forthcoming bankruptcy process not only to ensure that a fair deal is secured for both Puerto Rico and its creditors, but also to put the Puerto Rican economy back on an economic growth path that might restore prosperity to the island.
{mosads}It was always fanciful to think that Puerto Rico could either repay or engineer a voluntary restructuring of its public-debt mountain. This is the case not simply because the Puerto Rican economy has now been in a secular slump for the past 10 years, its public debt-to-GNP (gross national product) ratio has risen to over 100 percent and its unfunded pension liabilities now exceed 50 percent of the size of its economy.
Rather, it is also because the island has no fewer than 18 separate bond issues, each of which has different legal protections or claims to different streams of government revenues.
In light of the island’s highly-compromised public finances, one should not have been surprised by Wednesday’s request by Governor Rossello for bankruptcy protection. After all, the island was being hit by a slew of damaging creditor lawsuits in the immediate wake of the May 1 expiry of the temporary stay against such litigation.
Rather, one should have been surprised that the governor waited until after the lawsuits had been filed before he sought such protection given how inevitable bankruptcy for the island seemed to be.
One must welcome Governor Rossello’s decision now to seek bankruptcy protection. This should provide the framework for an orderly and fair restructuring of the island’s debt without rancorous and economically-damaging creditor lawsuits.
In addition, it should also provide the island with breathing room to put its economic house in order. However, it would be a grave mistake to think that declaring bankruptcy and debt restructuring will, in and of themselves, provide a solution to the island’s grave economic and social problems.
The orderly restructuring of Puerto Rico’s debt should be seen as a necessary, but far from sufficient, condition for its economic revival. Rather, for revival to occur, the island needs to supplement its ambitious efforts at budget consolidation with serious efforts at reforming and modernizing its economy.
These structural economic reforms would seem to be all the more necessary considering that one needs an offset to the negative impact on economic growth from the large budget adjustment that the island will need to do within a U.S. dollar straitjacket. These reforms would seem to be especially needed in the area of labor market practices and to make the economy more hospitable to both domestic and foreign investment.
It would also help if the U.S. Congress provided the island with a helping hand in its difficult adjustment process. It could do so by, at the very least, repealing the onerous Jones Act and by making Medicaid transfers to the island more readily available.
To date, the Puerto Rican government and its oversight board have failed to come up with a comprehensive and coherent economic program to revitalize the island’s economy beyond prescribing a multi-year, budget belt-tightening program. They have failed to do so even though the island desperately needs an IMF-style program involving debt relief in return for a real commitment to far-reaching economic reform.
One has to hope that the initiation of bankruptcy proceedings might now concentrate minds as to the urgency of implementing real market reform to get the Puerto Rican economy growing again. Failure to do that soon risks pushing the Puerto Rican economy beyond the point of no return.
Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.
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