Remember when two months ago Schauble jokingly offered Jack Lew to "trade" Greece for Puerto Rico? Something tells us in the interim period the German finmin changed his mind because while the Greek can has been kicked again, if only for the time being until bailout #4, the full severity of the Puerto Rican insolvency was laid out for all to see moments ago when top officials and outside advisors to the commonwealth released a highly-anticipated report showing that even after implementing proposed economic reforms and budget cuts, the island's whopping funding gap of $28 billion will at best be reduced to "only" $13 billion over the next several years.
Even worse, as the FT reports according to the report of the so-called Working Group, the Treasury’s single cash account and Government Development Bank would exhaust available liquidity before the end of the year, creating a cash shortfall in late November or early December. In other words, Puerto Rico is Greece, and unlike the German colony, Puerto Rico does not have any negotiating leverage to threaten a departure from the dollar zone, or threaten to print its own currency.
FT adds that "while the government will be able to manage around those year-end issues, the cash crunch will come to a head in June, when officials on the Working Group conceded it would be nearly impossible to tap financial markets. The plan, which will be closely scrutinised by investors who have just agreed a restructuring with Puerto Rico’s electric power authority, included proposals to consolidate the commonwealth’s education department, reorganise the Department of Economic Development and create a fiscal oversight board."
The plan will hardly be greeted with cheers domestically as it anticipated "austerity" that makes recent Greek sacrifices seem like a walk in the park: cost cuts identified included a continued salary freeze for government employees and a request for a waiver from the Jones Act, which requires shipping to and from US ports to be conducted with American crews and vessels, increasing the territory’s transportation expenses.
This even as only 40 percent of the working population is in the workforce and island pensions face combined unfunded liabilities that topped $37 billion in fiscal year 2013.
But while domestic cuts are inevitable, the real question is how much debt will be cut: as Reuters notes, "the financial overhaul plan, the product of a task force created in June by Gov. Alejandro Garcia Padilla, anticipates the island running out of money by next May or June, and says even with sweeping spending cuts Puerto Rico needs concessions from bondholders who include mom-and-pop investors and big Wall Street hedge funds."
Padilla's administration will now prepare for the test of trying to implement the plan in the face of potential legislative gridlock and possible resistance from teachers' unions. But the biggest pushback will come from creditors who like in the case of Greece will fight tooth and nail not to be impaired:
According to Padilla's so-called working group, comprised of officials including the Governor's chief of staff, Victor Suarez, and the head of the Government Development Bank, Melba Acosta, Puerto Rico has $47 billion of debt excluding public agencies like power utility PREPA and water authority PRASA.
Of that, $18 billion in principal and interest are due in the next five years, and this piece is targeted for restructuring, according to working group officials. This includes general obligation debt - generally seen as sacrosanct by the municipal bond market - and COFINA sales tax bonds.
One working group official said reform measures would account for around half the $28 billion budget gap with revenue growth adding a bit more, but that there is still roughly a $12 billion to $13 billion deficit that needs to be eliminated.
As Reuters wryly adds, "That could mean difficult negotiations with creditors." Difficult, but unlike the case of Greece, not impossible, as a writedown here would not impair a central bank and put fundamental moentary policy tenets under the microscope.
Next steps include the commonwealth following the approach it adopted with restructuring PREPA, a deal it struck earlier this month which saw bondholders accept a 15 percent reduction in their principal, a member of the working group said.
In terms of austerity measures to be implemented, the group recommended cutting the size of the department of education through school closures, attrition and changes to teachers' pensions, and cutting subsidies to the University of Puerto Rico and to some cities and towns, according to background materials provided.
The group tackled Puerto Rico's inefficient tax collection, suggesting overhauling collection methods and changing tax laws to promote growth.
The group said Peurto Rico must control healthcare costs by standardizing health protocols, and install new accounting systems.
Of course, hints at a bailout were not absent: the proposal said Puerto Rico should the push U.S. government for help, notably to provide access to court-sanctioned restructuring laws, exempt the island from the Jones Act, offer equitable treatment under Medicaid and Medicare funding schemes, and pass tax legislation that would promote corporate growth.
For now, however, a bailout from Washington is not expected, and while some on Capitol Hill are pushing laws or reforms that could help Puerto Rico, their prospects are uncertain. Expect that to change if and when the local population revolts at the proposed austerity measures and the next president realizes Puerto Rican votes are quite critical to any successful White House campaign.
Full Working Group proposal below (link)