Study confirms P.R. debt restructuring leading to new unsustainable payments

One year after Judge Laura Taylor Swain approved the agreement on the Sales Tax Financing Corp. (COFINA, in Spanish) bonds which, with the consent of a majority of the members of the Puerto Rican legislature, was presented by the executive and the Financial Oversight and Management Board to the bondholders, a study by economist Daniel Santamaría-Ots, senior analyst with Espacios Abiertos, shows that the savings announced by the governor and the Board were false.

Those who negotiated on behalf of Puerto Rico overestimated savings from structural reforms and underestimated the contractive effects of austerity measures, and unfortunately, it is the residents of Puerto Rico who will once again be asked to respond with their pocketbooks, according to the report.

“This pattern of overestimation and underestimation has for decades been one of the causes of Puerto Rico’s current situation — an island with crippling and unsustainable debt,” Santamaría-Ots said.

“While Congress justified the imposition of a Financial Oversight and Management Board as the organism that would address and halt that behavior and restore fiscal stability, the evidence now shows that the Board has behaved in the same way as the government and that Puerto Rico, far from emerging from the crisis, is edging closer and closer to another cataclysmic fiscal abyss,” said the analyst.

Result of the conversion of the COFINA bonds
For his study, Santamaría examined the six fiscal plans issued by the Board since passage of PROMESA and also the conversion of the 171 old COFINA bonds, calculating their equivalence in the new bonds.

“The $17 billion in ‘savings’ that both the Financial Oversight and Management Board and the government announced, and that is still to be seen on the COFINA website, is a figure that experts say makes no sense and that this report confirms is wrong,” Santamaría-Ots said.

“That this calculation is still defended by both the Board and the government defies the laws of finance, ignores basic principles of asset valuation, and calls into question the capacity or intentions of those who are supposed to be defending the interests of the people of Puerto Rico,” he said.

The projections of savings in the case of COFINA make no economic sense because both the government and the Financial Oversight and Management Board measured those savings against a promise of 100% repayment, a promise broken the moment Puerto Rico was unable to pay its debt and declared bankruptcy, according to the study.

The agreement’s negotiators (the government and the Financial Oversight and Management Board) took as their negotiating baseline not the price of the bonds weeks before the hurricanes in September of 2017, but instead the exaggerated increase in the price of the COFINA bonds after the hurricanes and the announcement of federal disaster aid for Puerto Rico, as the markets were including the effects of the federal aid in their prices, he said.

“It is stunning that for a debtor as ‘strapped’ (to use a non-technical word for it) as Puerto Rico, a bond in a state of default, like that of COFINA in the consolidated graph below, should go from being worth approximately 30 cents on the dollar weeks before a major hurricane to a worth of 50 cents on the dollar in mid-2018,” Santamaría-Ots said.

The Espacios Abiertos study asserts that the negative result of the COFINA agreement is also due to the fact that the effects of the imposed austerity measures were underestimated and the debt restructuring was done in a fragmented manner, without following the sustainability parameters presented in a study by Martín Guzmán, Joseph Stiglitz, and Pablo Gluzmann published by Espacios Abiertos in January 2018.

This study determined that Puerto Rico was able to pay between $7.2 billion and $14.4 billion, equivalent to relief of 80% to 90% of its $72.2 billion debt. The study presented by EA and published by the National Bureau of Economic Research is the only debt sustainability analysis in Puerto Rico published after the default and PROMESA, and it is cited as an authority by the community of local and international economic experts.

“Just as EA’s experts like Martín Guzmán warned, a fragmented restructuring is occurring — a process for which COFINA set the worrisome and dangerous precedent — and this fragmented process is causing constant reevaluations of expectations for economic growth, resulting in a myriad of ever-changing fiscal plans which, in turn, send a message to the outside world of great uncertainty about the real possibility of restructuring public debt to sustainable levels that would make financial recovery in Puerto Rico possible,” Santamaría-Ots explained.

The fragmentation and the consequences of the austerity measures are reflected in the countless fiscal plans presented, six of which have so far been certified, and of those six, five in a single year.

“The constant revisions arise of out-projections of the growth of the Gross National Product that never materialize, and out of anticipated savings from the structural reforms and reductions in government spending, which also fail to manifest themselves,” he said.

There is also the matter of the cutback in the federal aid promised after Hurricanes Irma and María (whose estimates were included in the fiscal plans); the inconsistencies in the projections of population variation and economic growth estimated in the October 2018 fiscal plan — figures which were used as a basis to justify the approval of the COFINA restructuring agreement, ignoring all the warnings of experts in economics, the study showed.

The study recommends:

• COFINA should not be a referent for future agreements on the debt owed by the central government and the Puerto Rico Electric Power Authority (PREPA). Those agreements should, on the contrary, meet the criteria for sustainability in public debt payment recommended in the 2018 Espacios Abiertos study and those backed by an overwhelming consensus of local and international economists.
• The next fiscal plans should include an immediate halt to the fiscal austerity proposals discarded by the international economic consensus due to their absolute failure and disastrous consequences: aggravation of economic crises, the triggering of massive migrations, and increased poverty and inequality among the remaining population.
• There should be a halt to the overestimation of the effects of structural reforms on the growth of the real GNP, which is not having the expected positive effect on economic growth, as the experts predicted and the Board itself is timidly beginning to recognize.

“We insist,” Santamaría said, “that the supposedly positive impacts of those reforms contradict the basic principles of economic theory in the context of the insufficient aggregate demand now being experienced in Puerto Rico.”