An Analysis of Puerto Rico’s Debt Relief Needs to Restore Debt Sustainability

Gluzmann, Pablo; Guzman, Martin; Stiglitz, Joseph E.

Puerto Rico’s economy has been suffering a recession for more than a decade. The recession has led to a debt and economic crisis. The lack of opportunities has resulted in migration outflows that affect the lives of thousands of families and leave a higher burden on those who stay. Overall, the current macroeconomic dynamics is destabilizing the lives of nearly 3.5 million U.S. citizens in Puerto Rico. Reversing this dynamic requires appropriate macroeconomic and debt policies. The collapse of economic activity has made the full payment of public debt unfeasible. Our study’s main goal is to offer insights for designing a plan of action for resolving Puerto Rico’s current debt crisis. The design of a restructuring proposal must note that the relationship between debt restructuring and fiscal policies exhibits bi-directional causality. On one hand, absent macroeconomic policies that expand the aggregate demand, Puerto Rico will not recover; and if the economy does not recover, Puerto Rico will not be able to pay its creditors without imposing severe damages on its nearly 3.5 million residents. On the opposite direction of causality, a larger debt reduction would imply that the territory would have more resources for expansionary macroeconomic policies, making the recovery more feasible and full repayment of the restructured debt more likely. Our contribution is thus twofold. First, we examine the macroeconomic implications of Puerto Rico’s Fiscal Plan that has been approved for fiscal years 2017-18 to 2026-27, as it is a crucial element for a computation of Puerto Rico’s debt restructuring needs. Second, we perform a Debt Sustainability Analysis (DSA) that incorporates the expected macroeconomic dynamics implied by the Fiscal Plan in order to compute Puerto Rico’s restructuring needs.

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April 15, 2019