Sunday, March 18, 2018

[Column] Should Puerto Rico pay its debt?

By on February 20, 2018

Should Puerto Rico pay its debt?

Of course.

But there are some in Puerto Rico and the U.S. that answer: No. Nada. For a very simple reason: Puerto Rico can’t.

The bondholders, the bonistas, after all, are investors that voluntarily bought government bonds to make a return, to make money. All investments entail risk. So the bonistas should simply accept the reality that they lost.

The argument is that it is morally wrong to sacrifice the healthcare, education, the protection of the Puerto Rican people in order to pay off the investors.

And now there is the catastrophe of Hurricane María and the argument is: You want something more obscene than seeing the bonistas like vultures trying to feed on the carcasses of a prostrated, devastated Puerto Rico: trying to extract billions from a bankrupt Puerto Rico desperately trying to find homes, provide electric power for hundreds of thousands?

But there is also an unemotional, economic argument. How will Puerto Rico emerge from the economic and fiscal crisis, and now from the humanitarian crisis, if it is buried under the enormous weight of the $72 billion debt?

This is what the 24 expert U.S. and island economists wrote in the letter sent to the President and Congress last month. Accept, they wrote, that the debt is “unpayable”; cancel most or all of it. Otherwise, Puerto Rico is headed towards a horrific depression.

Others that came to Puerto Rico to see the hurricane devastation said the same. Even President Trump who called for “erasing the debt” before, once again, the White House “clarified” that he really did not mean it.

So the argument is: Forget who is responsible for the monstrous debt. That will get us nowhere. Let’s focus totally on getting Puerto Rico out of this terrible hole.

Paying nada, obviously, is the extreme position. Most people are saying that the bonistas must get something. Liberal Senators Bernie Sanders, Elizabeth Warren, Kirsten Gillibrand, after visiting the island, are preparing legislation to cancel the entire debt. But it would also create a federal $15 billion fund, half to pay off the Puerto Rican bonistas and the other half the U.S.

And this is the PROMESA Fiscal Board’s mission, to “restructure” the debt. In its first fiscal report, it suggested that the bonistas get paid 31 percent of the debt: that is, take a 69 percent hit. The restructuring is now before the special federal bankruptcy court created by the PROMESA law.

But the fundamental question everyone in Puerto Rico and the U.S. must answer is: How to get Puerto Rico out of the economic and fiscal crisis? And to do this Puerto Rico must regain its credit: the ability to return to the U.S. municipal bond market and borrow. And to borrow without having to pay ridiculously high, prohibitive interest.

Obviously, to regain Puerto Rico’s credit means regaining the bondholders’ trust. Obviously no one lends money if they think it will not be repaid.

Once trust is lost, needless to say, it isn’t easy to regain. Especially for Puerto Rico. It’s important to recall that not long ago bonistas tripped over themselves to buy Puerto Rico bonds. After all, the Puerto Rican Constitution itself virtually guarantees payment. The island had decades of rapid economic growth. And because the bonds, under Commonwealth status, are the only with triple tax exemption.

Above all, because Puerto Rico was world-known for its “fiscal responsibility.” For how seriously it took paying its debt. Puerto Rico always paid its debt.

Although everyone had reason to know it was going to happen, when Governor Alejandro García Padilla announced in 2016 that Puerto Rico cannot pay its debt, and would stop doing so, it was still shocking that this was happening in Puerto Rico.

So how can anyone trust Puerto Rico again?

First, it is evident that it does not help when the government talks and acts as if all the bonistas are “vultures.” Some are. About one-quarter of the total debt is held by hedge funds, and of that, about one-fourth by what can be considered “vultures” that bought at steep discounts. But not all.

Instead, the government should talk and act as if the bonistas are not “enemies.” They are, in fact, indispensable to Puerto Rico’s economic development. The only source of government borrowing is the U.S. municipal bond market that through the decades have lent Puerto Rico the billions that were spent to build the island’s infrastructure.

Second, Puerto Rico will not regain trust if the government, insisting that it cannot pay, at the same time says it will not cut government salaries, nor pensions, even the Christmas Bonus.

And third, admit to ourselves that the economic and fiscal crisis is, yes, our fault. Not of the bonistas, but of the policies and actions of governments elected by ourselves.

When Governor García Padilla made the 2016 announcement many of us were surprised for another reason.

In Cabo Rojo, in the jíbaro culture my parents were born and grew up in, it was a question of one’s honor, it was inconceivable that one did not pay off his or her debt. Historically Puerto Rico paid its debt not just because it was legally obligated to, but because that is how we see ourselves, because that is what we are.

Should Puerto Rico pay its debt?

Of course.

Of course, the bonistas will take a hit. Everyone knows that. But no economy can grow, indeed no government can function, without credit.

At this critical point in our history, Puerto Rico should be willing to admit that we have made, though the years, a terrible mistake and that we are all willing to accept the responsibility, to pay the price, to make the sacrifice, to also take the hit.

–A.W. Maldonado was a reporter and columnist at the San Juan Star, executive editor of El Mundo, and publisher and editor of El Reportero.

–The views expressed in the Opinion section are the columnists’ own and not necessarily the view of Caribbean Business.