Martin Guzman is a research associate at the Columbia University Business School, a professor of economics at University of Buenos Aires and a senior fellow at the Center for a New Economy of Puerto Rico. Joseph E. Stiglitz is University Professor at Columbia University and chief economist of the Roosevelt Institute. Antonio Weiss, a senior fellow at the Harvard Kennedy School, led the U.S. Treasury response to Puerto Rico during the Obama administration.
Hurricanes Irma and Maria brought devastation to an island that was already in a deep economic, social and debt crisis. The losses are immense. Hundreds of thousands are depending on external help to meet basic needs. Much of the island is without power and will remain so for months.
In October, President Trump proclaimed that the island's debt will have to be wiped out (which his administration has since walked back). We did the math, and the numbers are indeed correct. Post Maria, there is no capacity for any debt payments in the coming decade, and the entire debt stock will need to be massively written-down to make the island's recovery feasible.
Before the hurricanes hit Puerto Rico, the situation was already dire. The island was suffering the consequences of a decade-long recession and the largest wave of outmigration since the 1950s. The governor declared the $74 billion debt unpayable, and the public pension fund, with about $50 billion in obligations, reached a zero-funding level, unprecedented in the United States. The governor and the island's oversight board — which Congress put in place in 2016 to deal with the island's fiscal situation — recognized the dire circumstances and initiated a form of court-supervised bankruptcy last May.
In March, the oversight board approved a fiscal plan that provided a radical reduction in debt service over the next decade, cutting payments to creditors by about 80 percent. But the plan was silent about permanent debt write-downs and the extent of longer-term debt service, leaving uncertainty over the island's future obligations — even though any realistic forecast of Puerto Rico's output implied that the island would need a substantial debt write-down.
Even before the hurricanes, it was clear the fiscal plan would have to be modified. Without much-needed federal funds, it relied on a draconian path of fiscal adjustment, particularly in the initial years, including unacceptable cutbacks in essential public services, education and infrastructure investments. Absent changes to the plan, the economy would head into a deeper recession that would make a return to growth even less likely.
Hurricane Maria simply leaves no doubt that Puerto Rico's fiscal plan has to be rethought. Revenue will be far lower than expected, and, thus far, the federal response has provided inadequate funding for recovery and reconstruction. Since Maria, more than 200,000 Puerto Ricans have left for Florida, and forecasts project a 10 to 15 percent decline in the island's 3.4 million population. Absent an effective recovery plan, the decrease in tax revenue capacity will become permanent.
Indeed, the only way in which Puerto Rico will be able to pay something to its creditors — even a small amount in the distant future — is through economic recovery. And recovery requires not only that payments for debt service be cut in the short term but also that there not be an overhang of large payments in the long run. Such an overhang would destroy any hope of a return to economic growth.
Linking future payments to Puerto Rico's future gross national product, as has happened in some sovereign restructurings, could provide a partial solution. But the design of contingent bonds should ensure that the benefits of recovery flow substantially to the people of Puerto Rico and are not siphoned off by legacy creditors.
Those who bought bonds in the hopes of windfall profits should not be protected at the expense of the island, its economy and its future. And they should certainly not be bailed out by U.S. taxpayers. Creditors must finally face reality: Sky-high yields carry sky-high risks. This also means that individual savers, some of whom were misled into investing by brokers who failed to highlight risks, will have to face steep losses.
What is needed now, along with federal funds for reconstruction, is a massive debt write-down in a court of law. Debt relief will seed the basis for a recovery that could lift the economy out of recession, attract young families back to the island and restore hope to the 3.4 million Americans who call Puerto Rico home.
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