Finalizing debt deal is first test for Puerto Rico’s new governor

Remember the Puerto Rico debt crisis?

It was only last February that a deal had been worked out between the island government and the holders of debt issued by the Puerto Rico Electric Power Authority (PREPA), signed into law by Gov. Alejandro García Padilla.

At $9 billion, this debt is one of the largest components of the $69 billion owed by the commonwealth and its various government units, a massive obligation recognized by all as unpayable both practically and politically.

{mosads}And a compromise last summer between Congress and the Obama administration — the Puerto Rico Oversight, Management and Economic Stability Act — created an oversight board with the power to restructure the massive overall debt and to force budget and other reforms yielding fiscal discipline over the longer term. It also halted litigation over debts that had been defaulted.

Since then, much has changed and much has stayed the same. The commonwealth has elected a new governor, Ricardo Rosselló, who will assume office in January. Like García Padilla, Rosselló understands fully that the commonwealth moving forward must create conditions that will restore the creditworthiness needed for access to capital markets. This means meaningful compromise with creditors and a willingness to accept — to share — the economic pain inherent in those deals.

Like García Padilla, Rosselló, an elected official who must answer to interest groups and voters on the island, is likely to prefer that the creditors endure more pain rather than less, and the opposite for the Puerto Rico debtors; and that the pain perceived by the latter be blamed on others rather than himself.

Because Rosselló is newly elected, he cannot be held responsible for the adverse fiscal conditions afflicting the island. Accordingly, he is well-placed to take actions consistent with his stated objective of reversing those conditions; and the obvious place to start is with the PREPA debt compromise already worked out, so as to achieve the longer-term creditworthiness goal as soon as possible.

Even as the process has dragged on for over two years, the PREPA bondholders have not wavered in terms of the economic losses that they have accepted, which can be summarized as:

• A 15 percent reduction in bond debt;
• A lowering of the interest rate on PREPA debt from over 5 percent to a rate as low as 4 percent (an approximate reduction of up to 25 percent), providing total debt service relief of at least $1.1 billion over the first five years, and at least $1.7 billion in the first ten years;
• A deferral of principal repayment for five years;
• Acceptance of a charge to electricity consumers for financing the principal deferral that would result in electricity rates of about 22 cents per kilowatt-hour (kWh), a rate over 10 percent lower than the 2015 PREPA rate of 25 cents per kWh, and almost 40 percent lower than the 2015 average of rates paid in (ascending order) Hawaii, Haiti, St. Lucia, Grenada, the Dominican Republic and the Virgin Islands.

Once finalized, this compromise would be the first major achievement in the broad economic restructuring process for the commonwealth.

Alas, it is not clear that this obvious opportunity has impressed Rosselló: He traveled to New York immediately after the election to resume “restructuring” negotiations with the commonwealth’s creditors, including the PREPA bondholders.

He and his advisers would be wise to ask themselves two simple questions.

1. What changes in the existing PREPA compromise are worth the additional delays attendant upon a renegotiation of the deal?
2. And given the difficult tug of war that characterized the negotiations leading to the existing compromise, is it realistic to expect a better deal for the debtors and the people of Puerto Rico that will not simultaneously harm the longer-term creditworthiness of the commonwealth?

After all, there are no free lunches. Future creditors, already wary of Puerto Rico debt given the recent default history and given the very difficult economic conditions afflicting the island, are unlikely to look kindly on efforts to squeeze even more from the creditors. This reality will increase the difficulties and costs of future borrowing for such crucial capital investments as modernized power stations, much other infrastructure, and environmental protection.

So precisely what is Rosselló attempting to achieve?

Perhaps he believes that a public effort to sweeten the terms of the PREPA compromise will reflect favorably upon him moving forward. Perhaps he believes that he must be seen as making some effort to improve upon the existing compromise.

But he must realize that a new deal with those creditors, even if assumed to be achievable, would be reached only through a grinding process taking months at a minimum. The effects upon Puerto Rico’s finances and access to capital in both the short- and longer terms would not be salutary, as discussed above. And if a new deal is not achievable, the political effects of such failure for Rosselló would not be favorable.

Perhaps Rosselló believes that the existing compromise attempts to squeeze too much blood out of the commonwealth’s debtors.

The problem with that perspective is straightforward: It is a stance that cuts both ways.

The PREPA creditors already have accepted large losses (see above), and it simply is impossible that new negotiations will induce them to accept additional ones; only some minor adjustments around the margins are barely plausible even if possible at all, at a cost in terms of time and adverse effects on the commonwealth’s creditworthiness that cannot be positive.

That is why now is the time for Rosselló to depart from the practices of his predecessor and to finalize this compromise.

It simply is impossible also that the oversight board will fail to impose real fiscal discipline — that is its raison d’être — and the painful adjustments for the island’s residents now looming large will not be eased by a continuation of the struggle over the PREPA debt.

And it simply is impossible that the longer-term interests of Puerto Rico will be furthered by a perception that its decisionmakers are unwilling to make and abide by deals achieved through negotiation processes both difficult and lengthy.

Rosselló would be very wise to speak truth to the citizens of the commonwealth: They must move forward, and there is no path that will prove less difficult than the one already paved.

That is the one promising renewed economic growth for the people of Puerto Rico.

Zycher is the John G. Searle scholar at the American Enterprise Institute.

The views expressed by contributors are their own and not the views of The Hill.