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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