Regions

Puerto Rico's rescue plan draws flak

September 17
9:20 PM 2015

The five-year restructuring plan proposed for ailing Caribbean island Puerto Rico has become a center of criticism from economists, who question that who shall benefit from this debt deal. Economists argue that the debt plan overstated the financial requirements of the island. 

The latest announcement of the five-year rescue plan for the ailing Puerto Rico is raising many eyebrows as some economists question several issues hidden in the debt deal. The financial assumptions in the debt plan are drawing attentions of economists, who publicly question very base of the heavy debt of the island. Governor Alejandro Garcia Padilla has recently chartered a debt plan to put the ailing island back on the track. He invited the voluntary participation of investors and bondholders in the proposed restructuring plan for reviving the Puerto Rico Island, which is facing a shortfall of $14billion over the next five years. The total debt of the island stands at $72bn.

Puerto Rico is a Caribbean island and unincorporated territory of the US. Its capital city is San Juan. The Caribbean island is suffering from a sluggish economy and lack of investments to boost the industrial activity.  

The proposed five-year rescue plan is highly overstated, feel some economists. In his rescue plan for the Caribbean island, the governor is expecting $14bn in concessions from the creditors, but the island needs only $5.7bn, according to Ryan Brady of Morgan Stanley. It's nothing but greatly overstating the financial requirements of Puerto Rico.

The latest round of austerity could bring cheer to bondholders as they feel reassured on the first restructuring plan is honored. Because, when the first restructuring agreement became due few months ago, it was declared un-payable. The deal was among Puerto Rico's Electricity Power Authority, municipal bond and hedge funds. 

With the news about second restructuring plan hitting the market, Puerto Rican bond prices started moving northwards. Local negotiators would be easy prey as there will be availability of huge funds in the island. 
Hedge funds that bought debt at 50 percent discount now find it easy to sell at much high price as bond prices are rising. Economists question that who's going to benefit from the five-year rescue plan, people or creditors or hedge funds or advisors to the government. Advisors on the restructuring plan already pocketed $30million as their fees and bonuses.

Puerto Rico's electricity company owes $9bn debt to a group of bondholders. The investors' group has agreed to cut the principal amount to the state electricity company. The bondholders group will get new securities worth 85 percent of their existing bonds in exchange for the reduction of the principal amount to the electricity company.

As part of the latest deal subject to the approval of the government, the principal amountgets reduced by $670mn and results in savings of $700mn in interest payments and principal over next five years. 

The overall debt of the island reached to $72bn and the governor says it's unpayable. The island needs restructuring plan for next five years, according to the governor Alejandro Garcia Padilla. Manufacturing is the main contributor to the GDP and the industry has been facing rough weather for over a decade. 

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