General obligations with an 8 percent coupon and maturing in 2035, the island’s most actively traded security, changed hands Thursday for an average 42.4 cents on the dollar, up from a record-low 20.75 cents Dec. 5, data compiled by Bloomberg show.
Desmond Lachman, a resident fellow at the American Enterprise Institute and former deputy director of the International Monetary Fund, said he’s concerned that some of the billions in U.S. taxpayer aid destined for the disaster recovery may ultimately end up in the hands of bondholders.
"My concern is that they’re just going to use U.S. taxpayer money to bail out the creditors, but meantime the island is going to languish," Lachman said.
The federal board plans to certify the fiscal plan Thursday in San Juan. Among other things, the plan calls for austerity measures, including cutting pension benefits by an average of 10 percent beginning in 2020 to curb spending and repair a retirement system that’s out of money. Rossello has balked at reducing pensions, saying it would place an undue burden on public workers and retirees. The board maintains that there needs to be shared sacrifice, and any cuts require legislative approval.
The turnaround plan, which has the stated purpose of fixing the island’s finances and reviving an economy stuck in a decade-long recession, will cut spending for schools and municipalities and try to boost growth through labor reforms and relaxing regulations. Congress created the federal board in 2016 to address Puerto Rico’s debt crisis, as part of legislation that also gave the island a path to filing a form of bankruptcy.
Lachman, the former IMF official, said he questioned the logic of any plan that paints a rosy economic picture when the island is facing accelerating emigration. The island has lost about 2 percent of its population every year for the past four, without counting the massive but largely unaccounted-for exodus after Maria.
"What kind of credibility can they have if they make one projection before the island gets hit by a once in a lifetime hurricane, and then suddenly it improves the situation?" said Lachman. "It just makes no sense at all."
This article was provided by Bloomberg News.