Hurricane Maria has devastated Puerto Rico. The worst part is the power system: as of right now, all generation assets are offline. All of them. The Puerto Rico Electric Power Authority (PREPA) says it is going to resume normal functioning on Monday, but nobody knows what that means. The (outdated and expensive) power plants appear to have survived the storm, but the main transmission cables are out. (You can get DOE updates here.) That is why power barges, while useful, won’t solve the problem until the transmission network is back up: the distribution network cannot move the power to the load centers. Besides which, there are not a lot of power barges sitting around ready to go.
Unless the Trump administration allocates an entirely-unexpected sum of money, Puerto Rico is going to need to borrow massive amounts for reconstruction. (In a past America, the GOP might think $10 billion in emergency aid enough to cement Republican control over the island for a generation. We no longer live in that America.)
The hurricane is going to permanently damage Puerto Rico’s ability to repay. Work by Leah Boustan (Princeton), Matthew Kahn (USC), Paul Rhode (Michigan) and Maria Lucia Yangua (UCLA), using a century of data, shows that natural disasters increase out-migration and permanently raise poverty rates. The latter, of course, is because wealthier people are more likely to move out. Puerto Rico, according to their estimates, will lose around 4 percentage points more of its population over the next decade than it would have otherwise; roughly 140,000 people and the associated economic activity.
That said, the hurricane is also likely to reduce Puerto Rico’s current debt burden. Title III of the Oversight Act (aka “PROMESA”) created a bankruptcy-like procedure for Puerto Rico. Under that procedure, judges and the Oversight Board have a lot of leeway. They will take into account that the island now needs more money and has less ability to repay.
What really needs to happen now is a fast resolution so that Puerto Rico can go back to the capital markets. Investors have short memories; the island will be able to borrow the $10 billion it needs for full recovery. But the existing debt needs to be written down. My worry is not that the debt won’t be written down enough, it is that it won’t be written down fast enough to speed hurricane recovery.
The hurricane has made it a little bit more likely that the courts will quickly write down debts. PREPA bond prices here; graphed below. They are falling. Puerto Rican general obligation bonds, which are much less likely to be restructured, are not falling; think of them as a control.
Privatizing PREPA could speed recovery by opening access to the capital markets. But there are two problems. First, in order to unlock the full value from a sale ($3½ billion is credible), you need to restructure the debts first. Second, in order to insure that the new enterprise gets the system in shape fast, you need enforceable performance targets. Many governments have screwed up power privatizations on both counts, so color me skeptical, although in this case the hurricane has likely left no alternative save more time with the lights out.
In short, the debt burden is going to slow Puerto Rico’s recovery from the hurricane and slow it a lot. But at the same time, the hurricane is also going to speed resolution of Puerto Rico’s debt crisis. Note that these things are not contradictory; better for everyone had the hurricane never happened. For a small fee, indeed.
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