Puerto Rico oversight board's success may hinge on the ballot box

[October 05, 2016]  By Nick Brown

NEW YORK (Reuters) - A forthcoming financial turnaround plan for Puerto Rico, which the territory's oversight board wants on its desk in nine days, will probably change after the island's November election. For the board, it could be a welcome scenario.

The bi-partisan board, created by the Puerto Rico rescue law known as PROMESA, set Oct. 14 as a deadline for the territory's governor Alejandro Garcia Padilla to deliver a draft plan for how to boost island revenues and tackle its $70 billion debt.

Garcia Padilla has unsettled Puerto Rico's creditors by insisting on deep debt cuts and defaulting on some payments, but he is not seeking a second term, so it will ultimately fall to his successor to work with the board to finalize the plan.

Ricky Rossello, the leading candidate for his job, is seen as more likely to deliver a plan compatible with the philosophy of the board. Its members include bankruptcy experts and bankers - technocrats expected to push for long-term stability, not just a quick financial fix or a massive debt cut that might be appealing to Puerto Rican politicians.

The 37-year-old Rossello, a member of the opposition party, told Reuters in an interview he wanted to shrink the territory's government to avoid further debt defaults, and in contrast to Garcia Padilla, opposed cuts to principal on the island's most senior debt.

"My view is general obligation debt should not take a haircut, but the good news is they have seemed willing to renegotiate terms - to refinance or extend," he said, referring to the island's most senior debt and its holders.

The board is largely reviled in Puerto Rico, where locals feel it infringes upon the U.S. territory's self-governance. Rossello and his main opponent, ruling party member David Bernier, have both taken issue with the scope of the board's powers, but said they would cooperate with it.

Daniel Hanson, a Height Securities analyst who closely follows Puerto Rico, said he expected the board's relationship with the new governor to be "some combination of strained and pragmatic" regardless of who wins.

Hanson added, though, that the board may find more common ground with Rossello than Bernier. "I think the board is going to find more in the Rossello policy that makes sense to them," he said.

ABUNDANT CHALLENGES

Puerto Ricans on Nov. 8 will choose a new governor, both houses of the legislature, mayors and local officials in what polls suggest could be a clean sweep for the opposition.

An ailing economy and a probe into the ruling party's alleged fundraising fraud have hurt its approval ratings and an August poll by Puerto Rico's top circulation newspaper, El Nuevo Dia, put Rossello 7 points ahead of his rival.

There is no shortage of problems a turnaround plan may address: Aside from its debt, Puerto Rico faces a $45 billion hole in its pension system, a healthcare system nearing collapse and public schools falling short of federal standards. Nearly half of its 3.5 million residents live in poverty and the population is dwindling as locals, who are U.S. citizens, flock to the mainland United States. (Graphic: http://tmsnrt.rs/2dr6nKd)

At its inaugural public meeting on Sept. 30, the board formally asked Garcia Padilla to deliver a draft plan within two weeks, but also acknowledged it could be revised as Puerto Rico's leadership changes.

"The plan is not static," Jose Carrion, the board's chairman, told reporters.

The board has wide powers, including approving Puerto Rico's annual budgets, reviewing the government's financial accounts and spending habits, and working with that government on projects to spur economic growth.

Rossello said his fiscal turnaround plan would replace a plethora of government employers with one, so workers could be shifted between public agencies. It would transfer several government agencies to private companies or nonprofits, and cut the overall budget by 10 percent, he said.

The savings, coupled with moderate debt restructuring that would preserve principal for senior bondholders, would avoid defaults without government job cuts, Rossello said.

Bernier's turnaround plan would focus more on cutting debt and salvaging essential services, specifically pension payments, said Bernier's running mate, Hector Ferrer. Bernier was not made available for an interview.

In both cases, candidates could have a hard time imposing their visions on debt restructuring, because under PROMESA, facilitating restructuring talks is the job of the board, not the governor.

Hanson was also skeptical Rossello can accomplish savings without shrinking government headcount. "It’s hard to imagine how simply consolidating agencies can result in significant budgetary savings without layoffs," he said.

The governor could have more leeway with issues like privatization and consolidation, both among agencies and municipalities, Hanson added.

(Reporting by Nick Brown; Editing by Daniel Bases and Tomasz Janowski)

[© 2016 Thomson Reuters. All rights reserved.]

Copyright 2016 Reuters. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.