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Default Does Not Buy Promesa ‘Light’

By on May 5, 2016

Gov. Alejandro García Padilla’s announcement on May 1 that his administration would not meet more than half of the $470 million due in debt-service payments on May 2—the commonwealth left nearly $370 million unpaid—is what American Indians in the Wild Wild West called speaking with a forked tongue. The García Padilla administration had several options available to it on the table, rather than betting that a crisis will force the U.S. Congress to act on our behalf. Cuidado; there are consequences.
In the seven days that followed the governor’s first announcement that Puerto Rico would default on its $470 million due, primarily in Government Development Bank notes, a slew of terrible actions ensued. For one, GDB bonds tumbled in value as they traded at between 17 cents and 21 cents on the dollar, from around 65 cents about a year ago. Businesses continued to close and another 1,000 people left Puerto Rico in search of better lives.
The governor made his faux declaration of default at the behest of some advisers who believe Puerto Rico must project being on the verge of a crisis to make certain that Congress will act on its behalf with the swift passage of the Puerto Rico Oversight, Management & Economic Stability Act (Promesa).
The advisers who are of that line of thinking pushed for default, despite knowing full well that there were already deals in place. All told, a deal with a hedge-fund group worth $120 million, co-ops in the fold for another $33 million and a $100 million payment from the P.R. Highways & Transportation Authority that could have been transferred to the bank to cut the gap in payment to a level that bond insurers were willing to cover.
As Caribbean Business reported first last week, there was a measure of last resort being contemplated by a faction of García Padilla’s advisers to resort to a relending mechanism similar to the one employed by the Puerto Rico Electric Power Authority in July 2015. On that occasion, the cash-strapped utility made a $415 million payment, tanking its reserves, which were then partially replenished (with $128 million) in loans from bond insurers.
If the commonwealth restructuring brigades knew that Puerto Rico had a path to payment, yet demurred, forcing a chain reaction that led to more economic decline and the conditions that might scare Congress into acting, this is shameful.
Failing to meet obligations when options are available has terrible consequences. And, advisers making six- and seven-figure salaries, who dare suggest otherwise, are not acting in Puerto Rico’s best interests.
So, we leave nearly $370 million unpaid, hoping that Promesa will pass in Congress, which has been called the “most dysfunctional place on earth.” Vamos mal. Then, the governor states that there is a particular brand of Promesa he prefers. He does not want the one that provides an oversight board with full control over all of Puerto Rico’s financial and economic affairs? He wants the one that has only moderate supervisory control with a little bit of restructuring on the side?
Whoever believes that we can ask for our brand of Promesa in the face of default is not thinking straight. This is not Baskin-Robbins where you can pick the flavor of oversight you want. No, it is more likely that you will see people who were not democratically elected exerting control over all of Puerto Rico’s financial affairs. To believe otherwise in the face of default and a failure to produce audited financial statements is an exercise in self-deception.
Bottom line—a majority of representatives in Congress are not willing to grant Promesa “Light.” Rather than beg, our elected officials should be working around the clock to raise the standard of living in Puerto Rico again.

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