Sunday, April 22, 2018

[Editorial] ‘Túmbame La Pajita’ Economics

By on April 16, 2018

Editor’s note: The following editorial originally appeared in the April 12-18 issue of Caribbean Business.

The most recent round of the rumble in the congressional jungle between Gov. Ricardo Rosselló and the Financial Oversight & Management Board (FOMB) is more akin to wrestling where the arm-twisting is for show. In essence, Puerto Rico’s government launched one more prefight publicity salvo in refusing to follow 35 of the 48 measures the board wanted included in revisions to draft fiscal plans delivered on April 5.

Gov. Rosselló’s refusal to include measures he views are beyond the FOMB’s purview—dictums in the realm of public policy such as the elimination of the Christmas bonus and minimum wage—are painful austerity policies that come with a political cost. The question that observers on the Hill are asking is whether this is mere finger-wagging prior to succumbing to fiscal plans that the board is submitting or whether Rosselló is in this for the full 15 rounds.

A drag-out tussle could be very costly. The Rosselló administration asserts that the estimated cost in legal and professional fees could reach $1.4 billion over the next decade as the various creditor constituencies sue over grievances in the restructuring of their debt under Title III bankruptcy proceedings contained in the Puerto Rico Oversight Management & Economic Stability Act (Promesa).

Given the recent shenanigans between the governor and the board, there are some creditors who fear the Rosselló administration’s estimates are conservative. The túmbame la pajita accounting underpinning Junateconomics could drive legal costs into the stratosphere. Even before the WWE caged match in the U.S. District Court for the District of Puerto Rico, Caribbean Business was told by one influential creditor from the monoline bond insurance realm that the legal costs could reach 5 percent of Puerto Rico’s total debtload—somewhere in the vicinity of $3 billion. At the time we thought it an exaggeration—now, not so much, given the added layer of hyper-mitosis between Rosselló and the FOMB.

How high these legal and professional costs climb will depend largely on how far the Rosselló administration is willing to go beyond these first stages of saber rattling. If, as expected, the Rosselló administration relents and merely blames the board—call it condemning the condemner—for all the pain Puerto Rico’s people will suffer in this rationed new world, perhaps the legal jamboree can be kept in check. It is certain, however, that there is pain coming down the pike for everyone except the lawyers and financial advisers who will make out like bandits.

In short, the opening shots—a scathing letter to U.S. House Natural Resources Committee Chairman Rob Bishop and the most recent missives to the FOMB—have already cost Puerto Rico immediate access to Community Disaster Loan (CDL) funds appropriated by the U.S. Congress.

Standing between Puerto Rico and as much as $2.03 billion in relief funds are an additional set of conditions drafted by the U.S. Treasury that address encumbrances tied to the reality that Puerto Rico’s debt is being worked out under Title III of Promesa. The U.S. Treasury will not allow the Puerto Rico government to use the money unencumbered—it is not to pay debt service, nor to pay for lobbying, nor to pay to restore damaged facilities. That reconstruction money will come from a different bucket and there will be no “double-dipping” here.

Put succinctly, a source on the Hill with ties to the Trump administration told Caribbean Business that Puerto Rico could have been receiving that money since the measure was first passed by U.S. Congress because all the objections to the conditions tied to the CDL funding and because “to the best of everyone’s knowledge, the government’s financial forecasting—that it would run out of money—has been wrong every step of the way.” Oh, by the way—Rosselló has until Oct. 31, 2018, to draw down from that account.

Thankfully, there is hope on the horizon in the form of some $18.4 billion for the reconstruction of infrastructure and housing destroyed by Hurricane Maria, and “mitigation activities.” Some $1.5 billion has already been earmarked for release by the Department of Housing & Urban Development (HUD) but is pending a concerted plan by the Rosselló administration. Important meetings between HUD, Puerto Rico’s government officials and leaders of the private sector have already occurred, and plans are in place to receive that money for works that include everything from providing housing to those who are living in subcode homes to building community centers and rebuilding damaged roads and bridges.

Many creative ideas have been thrown about by the Puerto Rico Builders Association and the Associated General Contractors of America on the housing front. For instance, there is a voucher program being discussed that would provide access for those who are living in gutted hovels to purchase or have new homes built—to code. With the construction will come jobs. Best to focus on meeting the milestones to secure HUD funds than to continue to add legal costs in the “snit for show” between the administration and board.

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