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Espacios Abiertos, debt restructuring expert, warn about implications of COFINA deal

Nonprofit organization Espacios Abiertos exposed a number of “suspicious elements” of the proposed agreement to restructure the Puerto Rico Sales Tax Financing Corporation (known as COFINA by its initials in Spanish) debt, which U.S. District Court Judge Laura Taylor Swain will review this week.

“We
said it last year and we stand by it today,” stated EA Executive Director
Cecille Blondet, adding that they are asking Taylor Swain –– who on Jan. 16-17 will
decide on the restructuring agreement of the COFINA bonds –– to rely on
experts’ approaches before “disposing of Puerto Rico’s funds and putting at
risk the health, safety and education of Puerto Ricans.”

During
a meeting with the media, Blondet posed the following questions: How will essential
services and the economic growth of Puerto Rico be affected by earmarking the
proceeds of the sales and use tax (SUT) for the next 40 years to pay COFINA’s restructured
debt? Is it reasonable to think that, in the absence of future economic growth
and downwards population projections, the SUT collections projected in the
Fiscal Plan will really grow at an annual rate of almost 4 percent?

“In
the face of an endemic fiscal crisis that we have faced since 2006 and without
a new economic model in sight, how can Puerto Rico face payments of almost $1 billion
annually — approximately 10 percent of its current revenues — when disaster and
recovery funds are spent?” she added.

On
the other hand, she proposed that, in a matter of such magnitude where the
numbers are just as important as the people who they will impact, citizens and
civil society organizations should actively participate in the decisions that
have to do with public debt issues, as it is done in some states in the
mainland, like New Jersey and in some cities such as Philadelphia.

“However,
we saw that on Nov. 7, 2018, the PC 1837 –– proposed legislative project of the
agreement of the COFINA Adjustment Plan –– was approved by the Legislature of
Puerto Rico without public hearings and without allowing any member of the Legislature,
organizations or citizens to ask questions, express their opinions or submit
any proposal or amendment,” she said.

For
his part, Economist Martin Guzman, who a year ago presented in Puerto Rico a
study commissioned by Espacios Abiertos to analyze the debt relief needs to
restore debt sustainability, together with the Nobel Prize for Economics Joseph
Stiglitz and Pablo Gluzmann, raised serious concerns about the agreement that
may be approved or rejected this week by Taylor Swain.

Through
this agreement, Puerto Rico must pay $32.3 billion during the next 40 years in debt
service. These annual payments begin at $420 million in 2019 and would increase
until reaching almost $993 million annually between 2041 and 2058.

Guzman
said the opportunity to right Puerto Rico’s fiscal ship has not been seized. On
the contrary, the oversight board recently certified a new fiscal plan and a
deal with bondholders issued by COFINA that could put the island in a debt
straitjacket indefinitely.

“Thanks
to the Financial Oversight and Management Board for Puerto Rico, COFINA
bondholders will now get far more than what they could have expected last
December, when Puerto Rican bonds bottomed out,” said Guzmán, a research associate
at the Columbia University Business School and an associate professor at the
University of Buenos Aires.

“Prices
of both COFINA and general obligation bonds have been steadily recovered, owing
to a political game over disaster relief funds that has been playing out among
the oversight board, the U.S. Congress, and bondholders –– a game that Puerto
Rico’s House of Representatives joined a few days ago when it passed a bill to
allow for the COFINA deal,” he said.

Blondet
added that some time ago, EA asked the government and the Board to publish
their debt sustainability analysis and that the response was partial and slow.
They made a new fiscal plan and have been making determinations without analyzing
if the debt is sustainable.

“If
there is an analysis by the government or the Board, we have not seen it. On
our part, we were transparent in making available the methodology of the
analysis that Guzmán prepared with his colleagues,” said Blondet.

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This story was written by our staff based on a press release.

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