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