An Analysis of Puerto Rico's Debt Relief Needs to Restore Debt Sustainability
This paper makes two contributions. First, we examine the macroeconomic implications of Puerto Rico’s Fiscal Plan that was certified in March 2017 for fiscal years 2017-18 to 2026-27. 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 debt restructuring needs. We detect a number of flawed assumptions in the Fiscal Plan that lead to an underestimation of its contractionary effects on the island’s economic activity. We conduct a sensitivity analysis of the expected macroeconomic dynamics implied by the plan that allows us to construct more realistic scenarios of Puerto Rico’s debt restructuring needs. We show that the island’s current debt position is unsustainable, and compute the necessary debt relief to restore sustainability under different sets of assumptions. The paper offers general insights for performing a macro-consistent DSA.
We wish to thank Gustavo J. Bobonis, Deepak Lamba-Nieves, Sergio M. Marxuach, Daniel Santamaria Ots, Brad Setser, Zaakir Tameez, and Jennifer Wolff for valuable discussions; and four anonymous reviewers and participants of a seminar at the University of Puerto Rico Law School for useful comments. Usual caveats apply. Martin Guzman and Joseph Stiglitz are grateful to the Institute for New Economic Thinking for supporting their research agenda on debt crises resolution. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.