Wednesday, December 8, 2021

The Second Time as Farce

By on July 14, 2016

The caveat that history repeats itself “the first time as tragedy, the second time as farce” in economist Karl Marx’s essay, “The 18th Brumaire of Louis Bonaparte,” well applies to Puerto Rico’s debt crisis. A look back in history at Puerto Rico’s public finance is useful because it makes patently clear that this is not the island’s first stare into the debt abyss. Puerto Rico’s access to the municipal bond market came to a screeching halt in 1975, when New York City’s economy tanked.

The dire economic circumstances and formidable challenges that the island faced in accessing the muni market at the time are reflected in a missive sounding the alarm signed by then-Government Development Bank (GDB) President Guillermo Rodríguez Benítez.

The document obtained by Caribbean Business portrays Puerto Rico stressed by a massive debt load that forced the GDB to restructure debt. In no uncertain terms, the former GDB president warned that: “the principle negative factors surrounding Puerto Rico’s bonds are—the frequency in going to market, the volume of emissions, the problems with budget deficits including the debt tied to pension plans and the Puerto Rico Electric Power Authority.”

Rodríguez took a painful look at the truth. He recruited a young rising star named Alfredo Salazar, an economist and banker who headed the GDB in 1975, and then later in 2005, to negotiate a note purchase agreement in a deal that secured the participation of all the major banks. Puerto Rico’s government was able to hold the fort until market access slowly returned. They did not hire million-dollar advisers to sit at the table for them.

“The most tragic thing
about this whole crisis
is that the U.S. Treasury
could have helped
Puerto Rico in a note
exchange program.”

The island managed to rebound with the legislation of Section 936 of the Internal Revenue Code, which granted a nearly 100% tax break to manufacturing companies operating in Puerto Rico that kept their funds in Puerto Rico banks. In 1989, nearly 82% of the funds in the GDB were Section 936 funds. Puerto Rico was able to leverage triple tax-exempt bonds and a healthy debt load that helped build key infrastructure works and, more importantly, had the revenue streams to guarantee repayment of debt.

But greed is a dangerous animal; an appetite for debt combined with self-deception in public policy put Puerto Rico on a path to insolvency. Puerto Rico saw debt jump to $10.4 billion under Gov. Sila María Calderón and to $15.9 billion under Gov. Aníbal Acevedo Vilá.

The trouble is not the size of the debt, but rather that it was not used for infrastructure development and the revenue streams for repayment—budget set asides to the GDB in future bond deals—were never tapped. Throw in a tanking economy and you have the perfect storm.

Then came the administration of former Gov. Luis Fortuño with more than $16.5 billion in debt issued against the backdrop of a hemorrhaging GDB. Danger, Jim Millstein.

The most tragic thing about this whole crisis is that the U.S. Treasury could have helped Puerto Rico in a note exchange program. That and the willingness of some creditor groups to enter into short-term liquidity fixes could have bought Puerto Rico some time. It would have helped to produce audited financial statements. People are usually much more willing to pull your chestnuts out of the fire— we call it sacar las castañas del fuego—when you can show them there’s a real fire.

Now, our politicians are aghast because we will have a territorial control board with complete command over Puerto Rico’s financial and budgetary affairs. But the gravy train is coming and when it arrives, it would be helpful if the person who wins the race to house-sit La Fortaleza delivers audited financial statements without caveats.

Then hold the bipartisan congressional committee for economic development to its task—demand concrete measures for economic development so we can get back on our feet.

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