Puerto Rico is still in dreamland, expecting a full US bailout to resolve their debt situation. They remain totally unwilling to make any serious cuts in the hopes of a big payout from Uncle Sugar:
Puerto Rico should be encouraged to plan for a better future. However, excessive optimism that understates the risks associated with fiscal austerity and the eventual withdrawal of reconstruction support will result in a debt restructuring on terms inconsistent with Puerto Rico’s capacity to pay. That will only set Puerto Rico on course for a second debt restructuring.
In making its latest economic forecast, the Puerto Rican government seems to be turning a blind eye not just to the island’s devastation but also to its dismal economic track record over the past decade, when its economy declined by 15 percent — a steady descent punctuated by only one year of growth following a large tax cut. Instead, it seems to have taken the view that a hurricane of epic proportions is in fact a form of divine intervention that will effectively result in a positive shock to near-term growth by way of increased congressional financial support.
One year ago, Puerto Rico’s certified economic plan forecast that a prolonged period of budget austerity would cause the island’s economy to decline by more than 10 percent. Now it is predicting an output level by 2023 that is 10 percent higher than in the previous plan. The government is doing so even though the economy was hit by a Category 5 hurricane, and even though it is proposing less economic reform than in its previous plan and a similar level of budget adjustment.
It is our view that the public-sector debt, which consumes roughly 30 percent of the island’s tax revenues annually, must be written down to the maximum extent allowable under the law. This should be done in the interest of getting the island back onto its feet and of avoiding a second debt restructuring.
This week, the oversight board appointed by Congress meets to review the new fiscal plan. For the sake of the island and all U.S. taxpayers, let us hope that its approach to the island’s daunting economic challenges is more prudent than that of the Puerto Rican government.