Thursday, September 21, 2017

[Editorial] Beware: Title III vs. Title VI



By on January 12, 2017

 

Miguel A. Ferrer, chairman, Ferrer Faass & Co.

Miguel A. Ferrer, publisher, Caribbean Business

The wrong choice could have disastrous consequences!

Promesa, or the Puerto Rico Oversight, Management & Economic Stability Act, provides a map where there was none to restructure our debt and reorganize our finances. Yet, the discussion that has arisen about which road to take, whether Title III—which requires a petition before a judge that resembles a bankruptcy procedure—or Title VI, which involves voluntary negotiations with creditors, could be the difference between climbing out of our abyss or plunging further.

Opting for Title III as a first option to restructure our outstanding bonds will generate a full-fledged storm of lawsuits that will extend our instability for years to come and cost many millions of dollars in legal fees. Moreover, an unduly harsh restructure penalty will keep the municipal bond marketplace closed to Puerto Rico for years to come.

We cannot risk losing our access to financing altogether, a real possibility we must avoid facing. Using Title III is the prelude to a war of attrition between Puerto Rico and the financial markets, represented by those who lent us funds to build airports, bridges, roads and hospitals, in short, the infrastructure that helped us progress from severe poverty to above third world standards. We need investment to upgrade and expand our infrastructure to remain competitive and guarantee our people quality of life. Thus, we need to find financing to accomplish future growth.

In contrast, if we take the road marked by Title VI, a process based on negotiation in good faith between bondholders and the government, we can avoid many of the pitfalls that going directly to Title III would produce. We must keep firmly in mind that about one-third of the outstanding bonds issued by Puerto Rico are in the hands of boricuas, who placed their ahorros where their hearts were, in Puerto Rico bonds. Their retirement income, their way of life depends in many cases on the outcome of these negotiations. We must not destroy Puerto Rico to save the government. Therefore, whatever route negotiations take, there is a need to preserve as much of their investments and income as possible.

In addition, keep in mind that many recent bondholders purchased bonds at deep discounts, and I do not believe it is appropriate to offer overwhelming returns on their investments at the expense of overlooking the need to add resources to the public pension plans, which are rapidly running out of assets.

The pension plan issue must be resolved without having it entirely fall on the shoulders of the bondholders who have absolutely nothing to do with the problem. This is a Puerto Rico problem and must thus be attended to. One alternative is to craft a fair property tax and partially assign the funds to the public pension plans as well as part of the proceeds from the sale of government properties. Solving the pension crisis will alleviate a huge pressure that touches almost everyone.

Our predicament is so dire that every actor in this drama, including bondholders, the government and pensioners, will have to shoulder some pain to arrive at a fair and just arrangement that can be promptly negotiated. I have advanced such a plan to the Financial Oversight & Management Board. Moreover, our governmental apparatus needs to be cost-effective and based on our reality.

Lastly, we the residents of this land must also take note that we need to expand our tax base. Tax avoidance, so entrenched in our society, needs to end. We also need to create a fair tax system that stimulates economic growth. Our growth will certainly depend on a tax philosophy that rewards success and does not stimulate consumption. Otherwise, our productive resources, our people, will continue to migrate in search of opportunities elsewhere. Let’s make sure we offer our people a good life on our shores. The opportunity is here, now!

ocean park

An aerial view of beachfront houses in San Juan’s Ocean Park neighborhood. (AP Photo/Ricardo Arduengo)

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