Puerto Rico may be nearing the end of bankruptcy. What does it mean?

Last month, a federal judge approved the largest debt restructuring plan ever reported in the United States, paving the way for an end to Puerto Rico’s long and painful bankruptcy process.

The plan — capping a years-long debate between creditors and local and federal officials — cuts most of the island’s largest chunk of outstanding debt from $33 billion to about $7 billion. The debt originally stood at $70 billion plus $50 billion in pension obligations.

Puerto Rico’s Electric Power Authority owes more than $9 billion separately. The financial watchdog tasked with bailing the island out of bankruptcy expects to have a plan for that debt later this year.

Last week, the board’s longtime executive director Natalie Jaresko, who helped broker the plan, announced her resignation effective April. She and the board have been criticized for the time it took to negotiate the plan as well as the austerity measures imposed in the meantime, but they hailed the deal as a historic step for the future of Porto Rico.

Although the plan is a step towards lifting Puerto Rico out of crippling debt, experts remain concerned about the island’s economic future.

According to the policy director of the Center for the New Economy, Sergio Marxuach, the plan is “based on long-term projections for the economy, which are very uncertain”.

Economists expect an influx of silver to reach Puerto Rico over the next five years linked to hurricane and earthquake recovery efforts. But the rest of the economy remains uncertain.

“I want to believe that elected officials in Puerto Rico and the United States are concerned that Puerto Rico needs to grow after reconstruction is over,” economist and University of Puerto Rico professor José Caraballo told ABC News. – Cueto.

“The economy is not going to grow on its own, and it’s not going to create jobs through more fiscal stimulus, either by receiving new federal funds or rather by issuing new debt,” he said. added Caraballo-Cueto.

How did Puerto Rico’s economy falter?

Decades of mismanagement and excessive indebtedness led Puerto Rico to file for bankruptcy in 2016 under Puerto Rico’s Supervisory Management Economic Stability Act (PROMESA). The law, signed by former President Barack Obama, gave the island an alternative because, as a territory, it could not file under Chapter 9, the traditional route for municipalities in financial difficulty.

The previous year, the island had defaulted on payments of $70 billion in public debt and more than $50 billion in pension obligations. The pension part of the debt will not be restructured, which means that each pensioner is supposed to receive what they have been promised.

“Puerto Rico’s debt is unpayable,” former Governor Alejandro García-Padilla said in 2015. Under his administration and President Obama’s last term, PROMESA was taxed, including its financial control and management board.

The seven-member board of directors is responsible for managing the island’s finances and has come under fire from residents, local and federal officials amid delays in finding a consensus that would lift Puerto Rico out of bankruptcy.

In a statement announcing his departure, effective April, Jaresko touted his accomplishments during his tenure.

“I am leaving the Supervisory Board at a time of recovery and stability. I am proud of what we have accomplished and I am confident that the road that has taken us to this important milestone will take Puerto Rico further towards growth and prosperity, Jaresko said in a statement.

Board Chairman David Skeel praised his work.

“I am saddened by his personal decision to step back, but I also understand his desire for change after five years of rewarding but hard and difficult work to help Puerto Rico recover from its fiscal and economic crisis,” Skeel said.

Jaresko, however, acknowledged that “these years were complex, and painful natural disasters, political unrest and the pandemic added to the obstacles we had to overcome.”

Months after the council began working on the island, Puerto Rico was hit by Hurricanes Irma and María, causing more than $90 billion in losses, according to the local government.

Three years later, the island was again hit by thousands of earthquakes and the ongoing pandemic, further weakening Puerto Rico’s economy.

What’s next for the island?

Puerto Rico will have to start paying off the debt in hopes that the island’s economy will grow regardless of any federal aid that is expected to arrive.

“It’s a leap of faith,” Marxuach, of the Center for the New Economy, told ABC News.

“It’s a big concern for us, that once that money dries up, we really don’t have, you know, a strategic vision, as you know, for growing the economy. And we could fall back into a recession,” Marxuach added.

Although many pundits are aware that the deal is not perfect and risky, they considered it a step towards pulling Puerto Rico out of the financial crisis.

Under the approved plan, pension obligations were protected, securing many retirees who feared for their economic stability.

“I think the positive side of this restructuring was that pensions were protected…and I think that’s a big win for civil society in Puerto Rico,” Caraballo-Cueto told ABC News.

While he favors full pension protection, Marxuach worries about what pension protection means for the ability to invest in younger generations.

“Protecting pensions was a good thing, but I think about how much we’re going to pay out of pensions every year going forward, which is about $2 billion and then think about how much we’re going to put from the general fund to the University of Puerto Rico, which is only $500 million,” Marxuach says.

As Puerto Rico enters a new phase in the bankruptcy process, experts warn this is just the beginning.

“We’re rounding the corner and things are starting to look up, but we still have a lot of work to do,” Marxuach said.

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