Economists including Stiglitz recommend up to 73% Puerto Rico debt write-down

Published: Nov 19, 2018 3:11 p.m. ET




Nearly three-quarters of island’s debt needs to be eliminated, economists say

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Nobel prize-winning US economist Joseph Stiglitz




Nobel Prize winning economist Joseph Stiglitz says Puerto Rico’s current debt position is “unsustainable” and has an idea how much debt relief is necessary to restore sustainability, in a new study with Columbia University colleague Martin M. Guzman and Pablo A. Gluzmann, a senior researcher at the National University of La Plata in Argentina.

In their paper, “An Analysis of Puerto Rico’s Debt Relief Needs to Restore Debt Sustainability,” Stiglitz and his colleagues say that the fiscal plan developed by the island’s government and approved in May 2017 by Promesa, the oversight board imposed by the US Congress to make the fiscal policy decisions for the island, has a number of flawed assumptions. Those errors lead to an underestimation of the earlier impact of the huge decline in economic activity triggered by a change in U.S. tax and trade policies and the subsequent failure of the island’s government and private sector to adapt to those changes.

The researchers describe Puerto Rico’s economic conditions as a result of a deep and long-lasting downturn as “demand constrained”, which means the level of economic output and employment is limited by the amount of overall demand or spending on the products and services produced. That calls for macroeconomic policies that expand the aggregate demand however that requires the capacity for financing them. Since Puerto Rico is experiencing severe demand-constrained conditions and faces an unsustainable debt burden that is a drag for economic growth, it lacks the capacity for expansionary policies. Attempting to force full repayment under those conditions creates a destabilizing dynamic, according to Stiglitz and the other researchers.

The researchers recommend significant debt restructuring as part of their revised sustainability analysis. Without debt restructuring, they write, Puerto Rico would be forced to create primary fiscal surpluses between 3.5% and 7.4% of gross national product from 2027 onwards. However, pursuing such a fiscal surplus would lead to an economic contraction that would make it impossible to collect enough tax revenues to achieve it, they believe. Such a fiscal surplus is therefore unfeasible, writes Stiglitz and his fellow researchers.

Puerto Rico owes approximately $72 billion to various bondholders, based on unaudited 2016 financial results, but its fiscal plan approved by its Congressionally mandated oversight board, Promesa, does not account for about $20 billion of debt for certain agencies including its electric utility PREPA. The fiscal plan, approved in early 2017 and since revised several times, is intended to be a roadmap for fiscal and governance reforms necessary to meet the objectives of its oversight board to eventually regain access to the capital markets.

After including this additional debt in the calculation, Stiglitz and his colleagues say the necessary reduction includes full cancellation of unpaid interest plus a face value reduction of up to 73% of this higher number of public debt, or $52.6 billion.

Stiglitz and his colleagues say their computations are conservative, since they do not address how the “deeper depression that the fiscal plan is projected to generate” may encourage more Puerto Ricans to leave the island for good.

The analysis does not recommend how the debt write-off will be distributed among bondholders, since not all bondholders will get the same discount based on their seniority of claims and legal decisions that go beyond the purpose of the paper.

The solution could include GNP linked bonds that align debt payments with Puerto Rico’s capacity to pay. By definition, say the researchers, these bonds “improve the sustainability of the restructured debt and align the incentives of the debtor and the creditors such that the creditors would also benefit from a stronger recovery,” say the researchers.

The paper’s analysis was done before Hurricanes Irma and Maria depressed the economic outlook for the island even more, and the fiscal plan has had four significant revisions since the March 23, 2018 version Stiglitz and his colleagues examined. The researchers say they have created a debt sustainability analysis that they say can serve as the basis for an updated study once more precise information on the costs of the hurricanes becomes available.

Debt Cancellations and Suspensions of Payment in the Past QUESTION 38
Is it impossible to cancel debt?

There have already been debt cancellations in the past, some unilateral, some as a decision of justice, some conceded by the dominant powers. We will present here a few significant cases.


United States

In 1776 the thirteen British colonies of North America decided to form the United States, and to end their dependence on the British Crown. The new state freed itself from the burden of its debt by declaring null and void all debts due to London.

In the nineteenth century, after the election of Abraham Lincoln as president, the Southern states seceded and formed the Confederation of American States.169 The War of Secession that followed (1861–65) saw the victory of the Northern states, which were opposed to slavery and in the process of industrialization. At this point, a further debt repudiation took place, this time to the detriment of the wealthy population of the Southern states. Loans had been contracted in the 1830s, mainly for the creation of banks (Planters’ Bank in Mississippi and the Union Bank in North Carolina, in particular) or to underwrite the construction of the railways.

In Mississippi, for example, the initial repayments were made, but then in 1852 a law was passed that allowed for a referendum, giving the inhabitants the chance to vote for or against the repayment of the bonds of Planters’ Bank. They voted against. After the War of Secession, in 1876, the Constitution was amended by a clause specifically forbidding the repayment of Planters’ Bank bonds. The new regime thus legalized the decision to stop repayments. The amount in the eight states concerned came to $75 million.


In January 1918, the brand-new Communist government formed after the 1917 Revolution, refused to take responsibility for the loans made by Tsarist Russia and unconditionally canceled all such debts. The new state, fruit of a revolution whose aim was to end the war and give the land to the peasants, refused to honor loans that had been contracted mainly to pay for the carnage of the First World War. These notorious “Russian bonds” then became virtually worthless and the remaining beautifully engraved certificates were sold off in flea markets for years.

Mexico and Other
Latin American Countries

As long ago as 1867, Benito Juárez170 refused to take on the loans that the preceding regime of Emperor Maximilian had contracted two years earlier with the French bank, the Société Générale de Paris, to finance the occupation of Mexico by the French army.

In 1914, in the middle of the revolution, when Emiliano Zapata171 and Pancho Villa172 were on the offensive, Mexico completely suspended its external debt payments. Thus, between 1914 and 1942, the most heavily indebted country on the continent reimbursed only symbolic amounts, to play for time. Between 1922 and 1942 (20 years!), lengthy negotiations took place with a consortium of creditors led by one of the directors of the JPMorgan Bank of the United States. Between 1934 and 1940, President Lázaro Cárdenas173 nationalized without compensation the petroleum industry and the railways, which were in the hands of British and North-American companies. He also expropriated more than 18 million hectares of the great landed estates (latifundias) belonging to national and foreign owners and distributed them in the form of “communal property” (ejido). He also completely overhauled the public education system.

Naturally, the creditors (mostly from the United kingdom and the United States) howled in protest at these radical, anti-imperialist, popular policies. But Mexico’s tenacity paid off. In 1942 creditors renounced about 80 percent of the value of the debts (they also renounced the interest arrears) and made do with small compensation deals for the companies that had been expropriated. Other countries, like Brazil, Bolivia, and Ecuador, also suspended part or all of their repayments from 1931. In the case of Brazil, the selective suspension of repayments went on until 1943, when an agreement reduced the debt by 30 percent. Ecuador, too, stopped paying from 1931 until the 1950s.

In the 1930s, a total of fourteen countries suspended payments over a prolonged period. Only Argentina, one of the biggest debtors, maintained its payments without interruption. But it was also the Latin American country which had the worst economic results afterwards.



Cuba was one of the first countries to successfully repudiate odious debt (in this case, a “subjugation” debt). In 1898, the United States had won the war against Spain and gained control of Cuba (until then, a Spanish colony). Cuba was separated from the Spanish Crown, as were Puerto Rico and the Philippines, and became a U.S. protectorate. After the war, Spain demanded that Cuba repay its debt but the United States rejected this demand.

The same year, a conference was held in Paris to deal with the problem; the United States contended that the debt was odious, since it had been imposed by Spain in its own interests, without the consent of the Cuban people. The conference agreed with the United States. Spain accepted the argument and Cuba did not have to pay.


Between 1889 and 1902, Turkey experienced a serious financial crisis that made it incapable of honoring its debts to Tsarist Russia. In 1912 the International Court of Arbitration at The Hague agreed that the Turkish government’s plea of force majeure was justified.

Costa Rica

In September 1919 the government of Frederico Tinoco in Costa Rica, considered illegitimate by the United States but recognized by other states including Great Britain, was overthrown. In August 1922 the new government terminated all contracts signed by its predecessor, especially those with its main creditor, the Royal Bank of Canada. Judge Taft, chief justice of the Supreme Court of the United States, which arbitrated in 1923, ruled in favor of annulment.

The transaction in question was concluded at a time when the popularity of the Tinoco regime had disappeared, and the political and military movement to end that regime was gaining strength. The Royal Bank affair does not hinge on the form of transaction, but rather concerns the Bank’s good faith. It lies with the Bank to prove that it provided the government with money for a truly legitimate purpose. This it has failed to do. We cannot consider that the Royal Bank of Canada has proved that the money paid was indeed destined for legitimate use by the government. Consequently, its claim must be rejected.




In 1919, the Treaty of Versailles at the end of the First World War considered that the debt contracted by Germany to colonize Poland could not be imputed to the newly constituted Polish state.174 Article 255 of the Treaty exonerated Poland from paying “that portion of the debt which, in the opinion of the Reparation Commission, is attributable to the measures taken by the German and Prussian Governments for the German colonization of Poland.” A similar stand was taken in the peace treaty between Italy and France, which declared that it was “inconceivable that Ethiopia should take on the burden of debts contracted by Italy in order to dominate Ethiopia.”


In 1953, the London Agreement canceled 51 percent of Germany’s war debt. The idea was that the debt service should not exceed 3.5 percent of its export revenues, a percentage that is far exceeded nowadays by developing countries. In 2006 the average was more than 12 percent! And yet Germany did not fulfill any of the criteria required at present to qualify for a reduction and its dictatorship during the preceding decade had sown death and destruction in a large part of the world. The cancellation was very beneficial for Germany, which later became the leading economy in Europe and the driving force behind European reconstruction.175

Namibia and Mozambique

South Africa was acutely aware of the consequences that the long regime of apartheid had inflicted on southern Africa and in 1995 unilaterally and unconditionally canceled all its debt claims on Namibia and again in 1999 with Mozambique.



In July 1985, the new president of Peru, Alan Garcia, decided to limit debt repayments to 10 percent of export revenues. This led to Peru’s banishment from the international community by the IMF and the World Bank, under the impetus of the United States, causing isolation and destabilization. The experiment lasted only a few months and the arrears on the interest, estimated at some $5 billion ($1.27 billion of which was owed to France) were directly added to the debt stock (capitalization of interest).

Cuba  (again!)

Also in July 1985, during a conference in Havana, Fidel Castro launched an appeal for non-payment of the debt and for Latin American and Caribbean countries to stand together and refuse to pay. This stance was under discussion but the governments of Mexico, Brazil, and Colombia, pressured by the United States behind the scenes, managed to put a stop to it.

From 1986, Cuba decided to suspend its debt repayments to the Paris Club. At this time, the amount concerned was more or less $2.5 billion. Twelve years later, in 1998, non-official contact was made between the Cuban government and the Club’s representatives. Negotiations took place in Havana and ended in failure. Three factors prevented an agreement: the U.S. government was against any agreement being reached as long as Fidel Castro remained in power; Cuba was not a member of the IMF, which made it impossible to reach the kind of agreement the Club is used to; and the Russian government was opposed to concluding a deal, demanding that Cuba repay its debt to the former USSR. Cuba had refused to pay this debt because of a fundamental change in circumstances: the currency in which the debt was contracted (convertible roubles) no longer existed and the state that provided the loans no longer exists. Other non-official negotiations discreetly took place in 1999 in Paris: they remain fruitless.

Burkina Faso

In July 1987, during a speech given to the Organization for African Unity (OAU), Thomas Sankara, the young president of Burkina Faso, announced that he too was in favor of unilaterally canceling debt and creating an African movement of repudiation.

The debt cannot be repaid, firstly because if we do not pay, the moneylenders will certainly not die of it; on the other hand, if we pay, we shall, with equal certainty, die. . . . Those who have led us into debt have gambled as though in a casino. When they were winning, there was no debate. Now that they have lost through gambling, they demand that we repay them. And there is talk of a crisis. They have gambled, they have lost, those are the rules of the game. Life goes on. . . . If Burkina Faso is alone in refusing to repay the debt, I will not be present at the next conference.

—THOMAS SANKARA, speech to the OAU,
Addis-Ababa, Ethiopia, 1987

On October 15, 1987, Thomas Sankara was assassinated. Since then, no African head of state has taken a stand to repudiate debt.


Since December 2001, as far as debt is concerned, Argentina has been in the headlines. After three years of economic recession, at the brink of disaster, Argentina was refused a loan which had been agreed to by the IMF. And this despite the fact that Argentina’s leaders had always implemented the unpopular directives demanded by the IMF. This brought things to a head and the country went into a serious economic crisis. President Fernando de la Rua reacted by freezing savings accounts. It was thus impossible for the holders of these accounts who had been patiently saving for many years, sometimes all their lives, to access their money. Spontaneously, the middle class took to the streets, joined by the “havenots” (the unemployed, the slum dwellers, and a majority of the poor).176 During the night of December 19–20, 2001, the people protested against the neoliberal policies of Fernando de la Rua’s government and his sinister Minister of the Economy, Domingo Cavallo. This popular action succeeded in altering the course of history.

Three presidents followed in quick succession. De la Rua fled on December 21, 2001, and his successsor, Adolfo Rodriguez Saa, was replaced by Eduardo Duhalde on January 2, 2002. Duhalde announced the biggest suspension of foreign debt in history, a total of more than $80 billion owed to private creditors and the countries of the Paris Club.

Hundreds of factories that had been abandoned by their owners were occupied and production restarted under workers’ control. The unemployed renewed their action in the “piqueteros” movement; the peso, which had been linked to the dollar, was devalued; the people created local currencies and shouted as one to the abhorred politicians, “Que se vayan todos!” (Down with the lot of you!).

After twenty-five years of uninterrupted agreement between the IMF and the Argentinean authorities (from the military dictatorship between 1976 and 1983 to the De la Rua government, including the corrupt regime of Carlos Menem), Argentina demonstrated that a country could stop debt repayments for a lengthy period of time and that its creditors would not be capable of organizing reprisals. The IMF, the World Bank, the governments of highly industrialized countries, the major media all had announced that chaos would ensue. But what happened? Instead of going under Argentina began to recover. The rate of growth over the next years was between 8 and 9 percent per year.

Nestor Kirchner, who was elected president in May 2003, challenged the private creditors by offering to exchange their bonds for new ones of a lower value. After lengthy negotiations which came to an end in February 2005, 76 percent of them agreed to waive more than 60 percent of the value of their securities. Once again, standing firm had paid off.

Unfortunately, the rest of the story is more disappointing. This agreement marked the resumption of repayments to private creditors. By the end of 2005 the government had paid back, in advance, the whole of its debt to the IMF: a total of $9.8 billion. It was possible to save $900 million on the interest, but the origin of the debt was never put on the table.

The dictatorship of General Videla, backed by the IMF and the superpowers, had used the debt to reinforce its hold on the country, to enrich its leaders and to firmly lock the economy into the dominant model. In order to repay this debt, subsequent governments sold off a large part of their national heritage and contracted new debts which are thus also odious. Furthermore, these new loans were subject to the implementation of massive liberalization, systematic privatization, and a decrease in social spending.

Consequently, Kirchner would have the right to end the agreements with the IMF and the World Bank, calling on the Olmos verdict (the name of the journalist who had filed a lawsuit against the dictatorship of Jorge Videla) of the Federal Court of Justice. This judgment gave solid legal reasons for pronouncing the debt odious and that it therefore did not have to be repaid.

Unfortunately, the agreement put to the private creditors in 2005 was more a Pyrrhic victory because to persuade the creditors to sign, the government offered to issue them new bonds with very favorable clauses involving a sort of automatic adjustment of the debt.

According to Eduardo Lucita, “These clauses are to a great extent responsible for the country’s new debt. First of all, more than 40 percent of the debt is made up of bonds issued in pesos whose interest rate is fixed at 2 percent per year. But the capital is linked to the CER (a coefficient calculated with the rate of inflation). This adjustment means that for each point of inflation, the debt increases by about $600 million Also, many bonds issued in foreign currency are linked to the growth of GDP. This is a very important element in the calculation of interest because Argentina is experiencing a growth rate of more than 8 percent per year. It is estimated that each clause involves additional interest payments of about $1.2 billion. Finally, because 20 percent of the debt is issued in euros and in yen—currencies which are appreciating against the dollar— and because the Argentinean peso is fixed to the dollar and is losing value, there is a technical adjustment due to the difference of exchange which makes itself felt also on the increase of the debt.”177

Argentina is back once again in a worrying situation with its debt. Its international funding is not good, but Venezuela is helping to refinance its debt. Future repayments are clearly on the increase. This is why the government of Cristina Fernandez de Kirchner, wife of Nestor Kirchner and elected president in October 2007, decided in March 2008 to increase export taxes on soya bean and other cereals. This gave rise to protest from farmers and a widespread political crisis. In July 2008, the president had to withdraw her proposal.

Even though renegotiating the debt is impressive, it can never solve the problems of debt once and for all. Debt leads to political crises and slows down national development. There are no possible alternatives. The only efficient solution is for our countries not to pay back these debts.


Even though Fernando Solanas’s film The Dignity of the Nobodies shows the situations of extreme poverty that Argentina is faced with, one event clearly symbolized that the time of standing firm to creditors is over: in September 2006 President Nestor Kirchner went to the New York Stock Exchange to ring the opening bell. There’s no double about it— Argentina was back in line. And in 2008, Cristina Kirchner announced that she would pay back in advance the Paris Club—to whom Argentina owes $6.3 billion.


In 1986-87, Gustavo Gramont Berres, Paraguay consul in Geneva, contracted a debt of $85 million toward a bank in Geneva, the Overland Trust Bank, in the name of the Paraguayan State even though he did not have the authority to represent Paraguay.178

In the 1990s, Overland Trust Bank sold these debt bonds to nine other private banks that, in 1995, demanded that the loan and its interests be repaid. Paraguay refused and the banks went to the Swiss courts to have Paraguay convicted.

In May 2005, the Swiss Federal High Court ruled in their favor, but in the following August, the Paraguayan government decreed (Decree 6295) that it was making the repudiation of this contentious debt official and giving its reasons for doing so. Paraguay also officially communicated its decision through diplomatic channels to the Swiss government. In October 2005, at the General Assembly of the UN, the president of the Republic of Paraguay confirmed his country’s unilateral action and their refusal to pay, stating: “This illegal action was carried out by the government employee of a corrupt dictatorship, who, in collusion with a group of international banks, wanted to rob our country of its desperately needed resources.” Furthermore, Paraguay filed an action against Switzerland before the International Court of Justice at The Hague and demanded reparations. For thirteen years Paraguay has refused to pay but no sanction has been applied.

All these examples show that the rare cases of firmness have had very positive results for the indebted countries. What might happen if various democratically elected governments supported by citizens’ movements together decreed a freeze on repayments? The Ecuadorian government could perhaps set the example. There is an urgent need for citizens to take in hand the problem of the debt everywhere they can, and to urge their governments to act accordingly.

Several “People’s Tribunals Against the Debt” have been held in recent years. In December 2000 in Dakar, during the meeting “Africa: From Resistance to Alternatives,” a group of women from the suburbs of Dakar wrote and performed Le Procès de la dette (The Debt on Trial) with the IMF, the World Bank, the G7, and the governments of the South standing accused. Women—victims in their daily life of structural adjustment policies—were questioned as witnesses. The involvement of the entire population—young people, women, athletes, trade Unionists—was remarkable throughout the conference, and gave this particular event an impressive resonance. In February 2002, at the World Social Forum at Porto Alegre, the International People’s Tribunal on Debt was held, at the initiative of the international network, Jubilee South, in collaboration with the CADTM. Various other tribunals were organized afterward. These examples show the need felt by the populations of the South, who endure the hardships caused by the debt, to see judged and condemned (symbolically for the moment) those responsible for the iniquitous system.

Furthermore, several attempts to allow the population to express their opinion democratically on the debt mechanism have been made. In Spain, during the general elections in March 2000, a “social consultation” was held calling for a vote on the abolition of the external debts owed by developing countries to the Spanish state. Despite the enormous difficulties made by the public authorities, who declared the consultation illegal, the referendum enabled over a million people to vote, of whom over 95 percent were in favor of abolition.

Then in Brazil, in September 2000, during the National Week which ends with National Independence Day and the “Grito de los excluidos” (Shouts of the Forsaken) with the march of the landless and the unemployed, six million people also took part, all over the country, in a similar kind of consultation, and 95 percent voted to stop the repayment of the Brazilian debt.

These initiatives are invaluable in popularizing the struggle against the debt and enabling the populations to express their anger and frustration.