CNE to Congress: Debt Restructuring Mechanism for Puerto Rico Is Urgently Needed but must be Workable

Statement on Washington D.C. Congressional Staff Briefing on April 28, 2016

The Center for a New Economy (CNE) has been invited by the Committee on Natural Resources of the U.S. House of Representatives to share its expertise on the complexities of the Puerto Rico fiscal and economic crisis with committee members and staff. In its briefing, CNE stressed the urgency for Congressional action, but cautioned that any bill approved by Congress must provide Puerto Rico with a debt restructuring mechanism that will actually work.

“We appreciate the opportunity provided by the Committee to discuss the urgency of addressing the Puerto Rico crisis and the serious consequences that a series of disorganized defaults by the government of Puerto Rico would have for bondholders, creditors, U.S. taxpayers and the residents of Puerto Rico,” said Miguel Soto-Class, President of CNE. “Puerto Rico’s economy and fiscal foundation are under enormous duress and the island needs urgent access to a comprehensive debt restructuring mechanism in order to protect the interests of all stakeholders involved in this crisis.”

“However, we must stress that while CNE supports the congressional effort to address the Puerto Rico crisis, we have strong concerns that the debt restructuring process as currently drafted in H.R. 4900 might not actually work. The debt restructuring mechanism as it stands in the bill is cumbersome and complicated,” cautioned Soto-Class. “Puerto Rico does not need a restructuring bill that can pass a House vote: it needs one that works.”

Sergio Marxuach, Policy Director of CNE, stressed: “providing Puerto Rico with an effective debt restructuring mechanism is not a bailout. On the contrary, it is a sensible way to protect both mainland investors and taxpayers from the unforeseen consequences of a string of chaotic, disorganized defaults. Delaying a necessary restructuring of Puerto Rico’s debt will only lead to the destruction of bondholder value and lower recovery levels through additional unsustainable borrowings, high interest rates, and restrictive fiscal policies that amplify economic contraction. A court-supervised process would help ensure fair treatment to all parties, including small, retail investors currently not “at the table”. The alternative—an untested and potentially disorderly process with numerous creditor lawsuits and years of scorched-earth litigation—would depress the local economy, increase restructuring costs, and make long- term recovery harder to achieve. If that scenario were to become a reality, then the probability of a federal bailout would increase significantly as bondholder groups would insist that Congress intervene to rescue them.”

Marxuach also highlighted that the imposition of a strong oversight board, in and of itself, would not address Puerto Rico’s lack of credibility with the capital markets. “Credibility cannot be imposed, credibility has to be earned,” stated Marxuach.

Finally, the Policy Director remarked that achieving fiscal balance is only part of the equation, “Puerto Rico also needs to design and implement a new economic growth strategy based on restructuring obsolete economic institutions; identifying new sectorial opportunities; and implementing economy-wide policy reforms such as lowering energy costs, simplifying Puerto Rico’s complicated permitting and licensing systems, modernizing outdated labor policies, and substantially improving K-12 educational standards.”

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Click here for the Spanish version of this text.
Click here to read our Briefing to Congress.
If you want to learn more about the complicated nature of Puerto Rico’s debt structure and why a debt restructuring mechanism benefits all stakeholders, click here.
Click here to access the key components of any solution to the crisis.

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