New Report Says Puerto Rico Can Avoid Default Through Budget Cuts and Tax Increases

Jul 27 2015 | 6:41pm ET

Puerto Rico can indeed pay its way out of its $72 billion debt hole without defaulting on its bonds, according to a new report by three former IMF economists commissioned by a group of investors that own an aggregate $5.2 billion of the island's bonds. 

Puerto Rico has been trying to restructure its outstanding debt, saying the burden is too high for it to bear, a view backed by former IMF official Ann Krueger in a report commissioned by the PR government a month ago.

Krueger’s report contents that Puerto Rico’s debt problems can only be solved via concessions from bondholders as well as further fiscal and economic steps. 

The new report, by Centennial Group authors Jose Fajgenbaum, Claudio Loser and Jorge Guzman, disagrees. It was commissioned by the so-called Ad Hoc of more than three dozen hedge funds and other investment firms that own Puerto Rican debt, and says the island can indeed service and repay its debts through budget cuts and tax increases.

“A global statement saying that the debt requires restructuring, we feel, is absolutely not substantiated,” noted Loser in a statement. That said, Loser did say that some of Puerto Rico’s 18 debt-issuing agencies might have to restructure. 

In response, the chief of staff of the island’s governor said “the simple fact remains that extreme austerity placed on Puerto Ricans with less than a comprehensive effort from all stakeholders is not a viable solution for an economy already on its knees.”

Default is potentially right around the corner. Puerto Rico has $36.3 million in Public Finance bonds due on August 1 whose repayment remains unappropriated by the Puerto Rican legislature. 

Earlier today, Puerto Rico’s 2035 GO bonds traded for $0.71 on the dollar for a yield of 11.8%, according to Bloomberg. 

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