Former Bank Chair Blames Inconsistent Policies For Current Puerto Rico Woes

The Puerto Rican Capitol building is seen as the US Congress held a sub-committee hearing on the island's debt burdens on Tuesday, Feb. 2, 2016. (Photo by Joe Raedle/Getty Images)
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The Puerto Rican Capitol building is seen as the US Congress held a sub-committee hearing on the island’s debt burdens on Tuesday, Feb. 2, 2016. (Photo by Joe Raedle/Getty Images)

By NAN Contributor

News Americas, WASHINGTON, D.C., Weds. Feb. 3, 2016: The former Chairman, President and CEO of the Government Development Bank for Puerto Rico yesterday told a U.S. Congressional hearing that the current fiscal and economic troubles of the island are “due to the implementation of inconsistent local fiscal and economic policies through several decades.”

Testifying before the Congressional Subcommittee on Indian, Insular and Alaska Native Affairs’ oversight hearing to further examine possible solutions to the Puerto Rican debt crisis and avenues for the Commonwealth to achieve improved fiscal management and long-term sustainability, Carlos Garcia said the crisis began with Puerto Rico’s special fiscal tax regime was repealed without any substitute economic growth strategy or plan.

“It was Puerto Rico’s main economic engine, fostering a manufacturing sector that represented 50% of Puerto Rico’s gross domestic product and generated over $30 billion in low-cost funding to the local banking system that trickled down to small businesses and consumers,” said Garcia. “This loss prompted outsized government overspending and hiring in an unsuccessful and unsustainable effort to revive the economy — mostly financed in the U.S. municipal capital markets or as part of the accumulated deficits and other debt obligations without a source of repayment (such as the ones discovered by the Local Control Board); and aggravated by inefficient public corporations and monopolies that became too complex to manage and technologically outdated. “

He said the island must be accountable for its shortcomings, but nevertheless urged concrete action by the U.S. Congress to help Puerto Rico find a prosperous path again while urging Congress to provide the framework and the tools  to allow qualified members of the at-large Puerto Rico to responsibly manage the affairs of the Authority under Congressional oversight and progress reporting to the Puerto Rico Legislature.

The panel on Tuesday discussed concepts surrounding the establishment of an independent control board authority. They argued debt restructuring alone will not ensure future prosperity and financial independence for Puerto Rico.

“Solving the immediate fiscal crisis, while absolutely essential, will not alone be sufficient to bring the Island back to the position of economic self-sufficiency,” stated former District of Columbia Mayor Anthony Williams. “Anything less robust than the work of such an authority is not going to provide a sustainable solution to Puerto Rico’s serious financial challenges; and waiting any longer to see if somehow the situation self corrects is fundamentally misguided.”

The Puerto Rican legislature has had the opportunity to enact a number of financial and structural reforms that would assist in alleviating the growing debt crisis. However, as demonstrated by the legislature’s recent failure to pass a deal that would restructure Puerto Rico’s public utility’s debt, such legislative action is in serious doubt.

Witnesses outlined the negative implications of enacting Chapter 9 bankruptcy protections, including detrimental impacts to future municipal investment in the Commowealth and harmful implications for investors on the island and the mainland.

“These people live on Main Street, not Wall Street. These investors are ordinary people who invest for retirement and for their children’s education,” said Thomas Moers Mayer, Kramer Levin Naftalis & Frankel, LLP Partner.  “I don’t think Puerto Rico will easily recover access to the capital markets if it ever uses Chapter 9. And I think it will have serious knock-on effects across the country.”

“Congress needs to be mindful of the consequences to the cost of municipal credit across our Nation if the Island’s debt obligations are not resolved in a manner that the municipal bond market sees as fair and equitable,” stated Williams.