Full disclosure upfront: I worked on Puerto Rico while at the U.S. Treasury in 2015. All views here are my own.
The Hill has published my column on PROMESA (the bill that sets out a framework for fiscal oversight and territorial debt restructuring that passed the House earlier this month and that the Senate is taking up this week). I support the bill.
Puerto Rico cannot continue to rely on fiscal gymnastics to delay an inevitable default, and needs to start building its budgets around credible estimates of revenues. The game of passing budgets that balance only thanks to overestimating revenue—and then finding ever-more-creative ways to cover the cash flow gaps that inevitably arise—needs to end. Puerto Rico desperately needs legal tools to organize its incredibly complex debt stock into a vote, and ultimately reach agreement with its creditors, the oversight board, and the court on a new payment structure.
A few additional points:
Puerto Rico’s nominal GDP growth over the past years has averaged about 1 percent. The nominal interest rate on Puerto Rico’s tax supported debt is about 5 percent. The basic debt dynamics are bad.
Contractual debt service on the tax-revenue supported debt is about 5 percent of Puerto Rico’s GNP (counting amortization payments, which tend to be modest). There is no way Puerto Rico can, nor should, run a primary surplus sufficient to cover all these payments. The new oversight board isn’t just needed to increase the credibility of Puerto Rico’s budgeting. It also should use its powers over the restructuring process to help guide the needed adjustment of Puerto Rico’s debts so Puerto Rico can avoid Greek style austerity.
Puerto Rico is not like a typical sovereign. And not just because it has a strange legal position as a territory, and not just because traditionally it has issued in the municipal bond market.
Most sovereign governments fund themselves by issuing unsecured bonds, which broadly speaking have the same legal rank (and yes, I am aware of the complexities here, and recognize that domestic-law domestic currency debt does differ in important ways from foreign-law foreign currency debt, even if both are typically unsecured).