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San Juan, Puerto Rico • Nobel economics laureate Joseph Stiglitz criticized Puerto Rico's new fiscal plan on Thursday, saying that its "draconian" austerity measures are the worst he has ever seen and could plunge the U.S. territory into an even deeper depression.
The former chief economist and senior vice president of the World Bank spoke to a gathering of more than 1,000 people in San Juan.
Stiglitz said the 10-year fiscal plan approved last month by a federal control board created by U.S. Congress is based on the wrong principles and erroneously puts creditors first.
"The policies that have been put forward I believe will in fact lead to another lost decade for Puerto Rico," he said. "It will cause enormous amounts of distress."
Puerto Rico is preparing to implement austerity measures that include cutting millions of dollars in government spending and to restructure some $70 billion in public debt. On Thursday, Gov. Ricardo Rossello announced he had reached a tentative deal with bondholders to restructure $9 billion of the debt held by the island's public power company, a significant step in helping turn around a decade-long economic crisis.
The deal replaces one the previous administration reached with bondholders after nearly three years of negotiations. While the board has not yet approved the new deal, government officials call it a success.
"The transaction represents the first step in the comprehensive restructuring of Puerto Rico's debt," said Gerardo Portela, executive director of the island's Fiscal Agency and Financial Advisory Authority.
The deal in part will help reduce Puerto Rico's average household power bill by $90 a year over the next five years. A bondholders' group said the overall agreement represented a fair solution for everyone and would help Puerto Rico regain access to capital markets.
Stiglitz said accessing new revenue is essential if the island wants to grow its economy, which he said should be a priority. He criticized the board for trying to squeeze money out of Puerto Rico's government when it didn't have any and without concern for how the island's 3.4 million people would be affected.
"What has been proposed for Puerto Rico is actually draconian for Greece," he said of austerity measures imposed during the south European country's economic crisis. "I've never seen a proposal as draconian as the one proposed here."
The board has in part sought $450 million in cuts at Puerto Rico's largest public university and has warned the government may need to cut by 10 percent a public pension system that is already running out of money and furlough tens of thousands of its workers. In Greece, the government has implemented higher taxes and cut pensions to the point where nearly half of pensioners' monthly income fell below the official poverty line.
Stiglitz suggested that Puerto Rico generate new revenue by following what Argentina did, such as issuing bonds linked to the GDP. That way, creditors get nothing if the economy shrinks but gets a portion of revenue if it grows, he said.
He also said mediation rather than bankruptcy would benefit Puerto Rico, where roughly 30 percent of public debt is estimated to be held by hedge funds.
Stiglitz warned that there are still "huge uncertainties" despite the plan, such as possibly underestimating the economic downturn.
"There will be international scrutiny, and especially if things don't go well," he said. "People don't pay attention to things until it's a little too late."