With Its Debt Crisis, Puerto Rico Must Treat Its Creditors Fairly
The Puerto Rican $70 billion dollar debt crisis is tragic, has led to massive levels of unemployment (almost half of the population of the island), it's nearly decimated the public health sector, and it continues to create a series of only bad choices for nearly everyone involved, including policymakers. One current matter that has become a point of hot debate is whether or not Puerto Rico's governor should reject a previously agreed upon restructuring plan with the commonwealth’s power company: Puerto Rico Electric Power Authority, generally known as PREPA.
Newly elected Puerto Rican Governor Ricardo Rossello is looking at options to void an agreement signed by his predecessor with PREPA, to find ways to reduce the amount of money that Puerto Rico must pay PREPA. People are watching this situation closely, because the PREPA situation may be an indication that Governor Rossello is looking to take a hard line with creditors. The Governor says that if the current PREPA agreement goes through, it could force PREPA to pass on costs – in the form of new charges on people’s bills -- to consumers who are already struggling to make ends meet.
I understand where Governor Rossello is coming from and I believe he is only trying to do what is best for his constituents who are already struggling to make ends meet. However, what I believe the Governor is failing to accept is that if he tries to renegotiate this deal with PREPA, and generally takes a punitive stance with other creditors, there will be many serious repercussions that will hurt Puerto Rico and the commonwealth’s residents in both the short and long terms.
First, consider what happens if PREPA cannot financially withstand the new agreement and goes into bankruptcy. I don’t see how under any circumstances, that would not be a disaster for the people of Puerto Rico. Imagine if the power company actually ceases to be able to function and provide the island with electricity on a full-time basis. That would set the island back by decades and create a place where no one wants to live, do business or take a vacation. I also believe this would have a terrible demoralizing impact on the population of the island.
Second, if PREPA were to go into bankruptcy, does anyone believe that this would not result in additional charges for customers? Of course it would, and one could easily argue that the new fees charged to customers could be even worse as the company was forced to deal with operating in bankruptcy – which reduces access to credit and other financial opportunities allowing PREPA to limit price increases to customers.
Third, if the Governor undermines the previous agreement with PREPA, it will create a sense of unfairness by all of the other creditors. This would create many long-term problems, because creditors would be less willing to do business with or in Puerto Rico. If this happens, it would mean increased financial hardships for the island; creating more human misery.
Fourth, if the Governor continues to create a process that is generally viewed by creditors as unfair, it could create an avalanche of litigation that would have the state tied up in the courts for maybe a decade or longer, with no cessation of economic stagnation. A provision preventing creditors from going to court is over on March 31st. Most creditors would like to avoid costly and timely litigation, and take the best deal they can get. But, if they believe they are being treated unfairly, they could and would likely take legal action.
I supported the creation of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) in 2016, because I believed that the best option for the people of Puerto Rico was to have an organized and fair process to help resolve the commonwealth’s debt crisis. As I said, there may only be bad choices for all parties involved. But it seems to me the less bad option is treating all other creditors equally and fairly through a comprehensive debt restructuring process. Otherewise, there will be a protracted court battle that will only make matters worse for all parties, especially the beleaguered residents of Puerto Rico.