Puerto Rican Proposal

The Island has made a definitive offer to its creditors: lower debt payments by exchanging debt and separate bond issue based on future growth to make up the difference. This would help reduce approximately 50B of the 70B in debt to 25B. This would leave 50B total on the table. It represents a 30% reduction in overal debt which is a commendable start.

The strategy is brilliant. It is a reverse bailout in the form of debt forgiveness. Adding the sweetener of the bond issue based on future payouts almost forces the hand and gives parties an excuse to let the island off the hook. Well played. 

On the other hand, they are now indebted in the future should the economy grow. They are giving a disincentive for the economy to grow. Parties will argue the payout is proportional to growing and won't hinder it, but that is not realistic. 

There is also the chance that the Federal government will bail them out. In this case the Island might be playing their hand too early. Or maybe the proposal to restructure debt is gesture that can lead to a supplemental, and more reasonable bailout. 

Perhaps, this model of future growth dependent bond issue can serve as a case study for future municipalities.

La Cueva Ventana - Arecibo (October 2014)