The Fiscal Oversight Board (FOB), is gradually entering the implementation phase of the provisions of the law that created it. Sometime in the next few weeks, the Fiscal Plan required by the PROMESA, will have to be submitted by the incoming government and the FOB will have to certify it, as established by Section 201 of Section 2 of the federal statute.
Last week, this body let it be known in a communication to the outgoing governor, Alejandro Garcia Padilla, and the governor-elect, Ricardo Rosselló, what were the parameters within which the five-years Fiscal Plan should be developed. The most important point of communication of the FOB was to recognize that the projected deficit for the next decade is $ 67.5 billion, $ 10 billion more than previously presented by the outgoing government. That said, the way forward from 2017 will be rough and complex for others.
Last week we also learned, with the publication of the Report of the Economic Development Committee of Congress, enabled by the PROMESA, that there will not be any help from the north.
Congress is sending us a clear message,” Fix yourselves as best possible and make hearts out of your guts”. In other words, we must begin to take personal responsibility for our actions, as happens when one enters adulthood. Let us understand that we are alone and we must start from this reality to start implementing it right for once in recent times.
SECTION 3 of the PROMESA.
In addition to seeking a reorganization of government finances, the PROMESA provides for creditors and the Government of Puerto Rico to reach agreements to restructure debt. For this process, the federal statute enables two possible routes, Section 3 of the Act, which establishes a restructuring process overseen by a court, if the creditors and the government do not reach agreements in good faith to meet the interests of both parties.
Specifically, this section sets and we quote from the law itself: “These provisions, taken together, authorize debt-issuing entities in PR to restructure their debts in a federal court-supervised process under certain terms and conditions, if efforts to reach a consensual or voluntary agreement have not borne fruit”.
In the statute, Section 3 says that “In order for a debt-issuing entity to access a court-supervised restructuring (a Title III restructuring), the oversight board must determine that: the entity has made good-faith efforts to reach a consensual or voluntary restructuring agreement with creditors, and (2) the entity has made public draft financial statements and adopted procedures necessary to deliver timely audited financial statements. If 5 of the 7 members of the board determine that these criteria have been met, the board shall provide a certification and the debt-issuing entity can access Title III”.
In short, before promoting a process of debt restructuring, under Section 3 of the PROMESA, both the Government of Puerto Rico and its creditors must have demonstrated an interest in negotiating in good faith.
This is the worst route that the government should choose, because it would create a complex, lengthy and adversarial legal process with creditors, and it would end up by completely closing the capital markets, as happened in Argentina. In this country, the legal process caused a capital flight estimated at $ 150 billion. Without being in this process, I know that Puerto Rico has experienced the flight of local capital, because of the climate of uncertainty created by the fiscal and debt crisis.
SECTION 6 of the PROMESA
The second option to restructure the debt establishes mechanisms for the Government of Puerto Rico to reach consensual agreements with different groups of creditors and restructure the debt. Under this mechanism, it is necessary to reach agreements with two thirds of all creditors distributed in 19 different issuances. Contrary to Section 3, under this mechanism, the Government of Puerto Rico, avoids a legal war, which will be expensive and costly, with creditors.
Moreover, under this option, the Fiscal Oversight Board ensures that the agreements reached with creditors will be sustainable in the long term, within the framework of the fiscal reforms to be implemented. This route, in the short term, is more beneficial to Puerto Rico, because, as well as routing direct agreements with creditors, it would allow access to low-cost financing to inject liquidity into the financial system, necessary to prevent collapse of the government, pay suppliers, honor rebates to taxpayers, and fund capital improvements that would allow viable economic growth.
To promote debt restructuring under Section 3 would sink us deeper into chaos and uncertainty. Clearly, we have to restructure, but this must be done in an organized and responsible manner that meets the needs of not only the government but also of the creditors and the needs of the economy in the long term.
