PROMESA’s Dangerous Premises
Improving Puerto Rico’s economic dynamics will require a new set of policies, including a debt restructuring that provides the country with the relief it needs to implement policies that enable a restoration of growth. But the ten-year fiscal plan that will provide the basis of debt-restructuring decisions could make a bad situation worse.
NEW YORK – Puerto Rico’s economy is in deep trouble. More than a decade of recession has made the public debt unsustainable and is fueling migration outflows to the United States mainland, affecting the lives of thousands of families and imposing a higher burden on those who stay. Reversing this destabilizing dynamic will require a debt restructuring that provides the relief needed to implement pro-growth policies. Unfortunately, what is being offered isn’t nearly enough.
Puerto Rico’s debt is to be restructured under a framework established by the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA). That federal law, enacted in June 2016, also established an Oversight Board with fiscal decision-making authority for the US commonwealth.
The restructuring process started on May 3, when the Board filed a petition in federal court. But many crucial decisions have yet to be taken, such as how much overall debt relief will be provided, and how the “haircut” will be distributed among holders of different types of bonds. These decisions will determine which policies are feasible to boost Puerto Rico’s economic prospects – and thus how much it can pay its creditors.