Wall St. Optimistic Over Rosselló Election
Dr. Ricardo Rosselló’s election as governor of Puerto Rico helped restore some market confidence that the territory’s debt-restructuring philosophy is more in line with the discourse that creditors have been seeking over the past two years.
“Based on our interactions with Dr. Rosselló, we expect he will surround himself with responsible people and advisers who are not myopically focused on a war with creditors rather than pursuing solid fundamental policy decisions,” Ambac Assurance Corp. CEO Nader Tavakoli told Caribbean Business in an exclusive interview. “In that sense, the island should benefit from a growth-oriented governor with advisers who will be interested in working with the oversight board to fix the fundamental problems that exist, create private-sector jobs and pursue the positive agendas that we and Dr. Rosselló have been talking about for so many months.”
Ambac Assurance is insuring about $2.4 billion in bonds at net par with exposure in the P.R. Highways & Transportation Authority (HTA), Sales Tax Financing Corp. and Puerto Rico Infrastructure Financing Authority, as well as bonds for hotels and public buildings. They are one of four monoline bond-insurance companies—insurance companies that cover the interest and principal when issuers default—which insure Puerto Rico bonds.
Total net par outstanding exposure to Puerto Rico bonds by Assured Guaranty, the Municipal Bond Insurance Association’s National Public Finance Guarantee Corp., Ambac Assurance, Syncora Guarantee and Financial Guarantee Insurance Co. was $15.7 billion as of June 30, 2015, according to the Bond Buyer. The financial guarantors have wrapped a broad spectrum of Puerto Rico debt.
The bond insurance community believes Puerto Rico should follow a revitalization model resembling that adopted in Washington, D.C., where a combination of austerity measures and economic-development incentives helped return market access within three years.
Although Rosselló told this newspaper that economic development is key in the equation, he told an audience during the Puerto Rico Revitalization Conference sponsored by the Association of Financial Guaranty Insurers: “Once we start passing some of the laws very early in our administration, this will push forward the path toward reducing the cost of government. I am convinced that we’ll get access to the markets as well, and we’ll be able to initiate those economic-growth strategies early on.”
The balance between austerity and growth is very tricky as it cuts into public-sector jobs and can put the brakes on the economic growth sought by incentives. According to Caribbean Business calculations, a 10% to 20% salary cut for 80,000 public workers not working in essential services—health, education and security—would lead to a minus 0.7% to minus 1.4% drop in Puerto Rico’s gross domestic product (GDP). This calculation does not include the 26% increase in electricity rates that the Puerto Rico Electric Power Authority is seeking, as part of its deal with creditors; the GDP hit would be higher.
The probability of job cuts has been forewarned by most observers who know that austerity is impossible to achieve without trimming the fat off a government that employs 158,000 people. That self-evident truth has prompted criticism from Rosselló’s detractors, who insist the governor-elect has the interests of bondholders as the priority rather than those of the people of Puerto Rico. Ambac’s Tavakoli says that the two interests need not be mutually exclusive.
“I’m just going to be consistent with what I have said all along, which is that I don’t see a broad space between the interests of the people of Puerto Rico and the interests of the creditors. It makes it really easy for me to say that I do think that Dr. Rosselló’s consistency in the comments that he has made privately and publicly during the campaign indicate that he is going to be much more transparent, much more responsible. From that perspective, it will be easier to get agreements done. So, it will be good for the creditors and Puerto Rico.”