It was a sensible move. The country does not have the means to pay its debt. It needs to restore the sustainability of its debt position as a pre-condition for any plan for economic recovery, and the only way for that is through a restructuring process.
Not declaring bankruptcy would have exposed Puerto Rico to massive litigation that would have not boded well for the island. At least 22 lawsuits had already been filed by a myriad of the island’s creditors. Vulture funds, which specialize in suing countries in disgrace to get full payment on debts that they buy in times of distress at large discounts, could have made a killing at the expense of Puerto Ricans and good faith creditors.
Promesa provides a legal framework with elements that are similar to a bankruptcy law, and as such it can certainly help the island and its creditors to achieve an effective and orderly restructuring; but to be sure, Promesa is not a guarantee of success.
It is a framework that didn’t come alone, but with the imposition by Congress of a bipartisan financial oversight and management board in charge of making the fiscal policy decisions for the island.
For a large part, Puerto Rico’s future is not in the hands of its people, but in the hands of a group of non-elected technocrats, that as such are not accountable to Puerto Ricans. If that sounds like what happens in colonies, that’s precisely because Puerto Rico is a US colony.
The first signs of the board’s behavior had been worrisome. In January, it demanded a set of draconian austerity measures, including large cuts to pensions, education and health spending, that would have led to catastrophic outcomes – including drops in economic activity not too different from the ones that Venezuela has been recently experiencing. In March, the board finally approved a slightly more moderate 10-year fiscal plan that is projected to lead to another lost decade for Puerto Rico.
Absent a substantial debt write-off, the fiscal plan will not only aggravate the recession, it will also worsen the sustainability of the country’s debt position – thus risking the country entering into a third consecutive lost decade after 2026.
It is now the time for Puerto Rico’s government and the board to outline a debt restructuring plan. And there is much uncertainty about the role the board will play. Will it respect its mission of creating “the necessary foundation for economic growth and to restore opportunity to the people of Puerto Rico”? Or will it try to squeeze as much as possible from the island to maximize the payment to the creditors in the short run, even if that means seriously aggravating its troubles?
Signs are not more encouraging when it comes to the White House’s stance. A few days ago, Donald Trump showed how much he cares about the lives of Puerto Ricans when he tweeted: “Democrats are trying to bail out insurance companies from disastrous #ObamaCare, and Puerto Rico with your tax dollars. Sad!”
Ultimately this crisis may be a wakeup call for Puerto Ricans, as the territorial experiment is reaching a critical point. The glossed-over territorial status created by the US in the mid-20th century – Puerto Rico’s Estado Libre Asociado, or Commonwealth – has been seriously undermined by the territory’s fiscal crisis. It is clear that being in a political middle ground is the worst of all worlds for Puerto Rico. It is a ground where there is serious risk of becoming another Greece.
And it’s also a wakeup call for the US. Deepening the Puerto Rican crisis would lead to higher migration to the mainland, and US taxpayers would have to pay for the costs that this would entail.
All stakeholders are now being forced to show their cards. The board’s actions will soon determine the degree of similarities between Puerto Rico and Greece. An important one is already in order: Greece lost its de facto sovereignty; thus, its authorities had no capacity to make decisions on behalf of the electorate when it came to resolving the country’s debt crisis.
The Troika got the power and it crushed Greece, depriving a generation of opportunities in their own land. Will the US now help or crush Puerto Rico? Puerto Ricans will soon know. What happens next will not only affect the economy, but it might also bring political changes – in one direction or the other – that for better or worse will reshape the future of the country.
Martin Guzman is a research associate at Columbia University Business School, professor of economics at University of Buenos Aires, and non-resident senior fellow at the Center for a New Economy in Puerto Rico.