Seems Puerto Rico can’t catch a break from the rating agencies.
In June 2014, the beleaguered commonwealth passed a law that would have enabled its public corporations to restructure. The next month, rating agencies downgraded its debt.
Last month, a federal judge struck down the law, ruling it unconstitutional. A week later, the same result: more downgrades.
What gives?
That’s the question posed by Tom Sanzillo in a commentary posted on The Hill. Sanzillo served as New York State’s former first deputy comptroller and acting state comptroller.
Puerto Rico debt, Sanzillo said, “isn’t junk.” In fact, the commonwealth has taken positive steps to put its fiscal house in order and stimulate its economy. “It’s time to take a step back and look at where Puerto Rico stands,” Sanzillo wrote.
Government’s multi-faceted efforts
Since taking office in 2013, Puerto Rico’s Gov. Alejandro Garcia Padilla has instituted various measures designed to address Puerto Rico’s years-long fiscal troubles. He’s cut spending, raised revenue and, for the first time in 15 years, officials expect a balanced budget this year.
Sanzillo argued Puerto Rico “should be credited for reducing its deficits from $2.5 billion to just $800 million over two years and consistently making payments on its debt obligations.” Further, it has attempted to ring-fence its General Obligation debt from its public corporations.
“This debt is 40 percent of GDP – far lower than comparable sovereigns – and is serviceable going forward,” he said.
Looking ahead
Bright spots for the commonwealth include lower oil prices, which should help stimulate the economy, and a bump in private-sector investment. Also, it’s well-regarded for its competitiveness by the World Economic Forum.
Going forward, Puerto Rico needs to ensure its public corporations are operated properly and reformed as necessary. Sanzillo said he favors enabling Puerto Rico to use Chapter 9, though only as a last resort. Additionally, he said it “should consider pulling some debt from troubled public corporations into a special investment vehicle and tying revenue – secured from those public corporations not the tax base – to service that debt. This act will provide some assurance to the market in restructuring scenarios.”
Puerto Rico’s debt isn’t unmanageable, he argued. “It’s fairly serviceable and the government has made difficult but necessary steps to cut its costs and boost revenue.”
Puerto Rico has significant challenges and a host of difficult, unanswered questions. However, amid the drumbeat of negative coverage, Sanzillo offers an interesting, contrarian perspective.