Wednesday, March 14, 2012

An open letter from Cate Long to Puerto Rico's Governor Fortuño

(This is Cate Long's response to Puerto Rico's Governor Fortuno's Administration rebuttal of the article Puerto Rico is America’s Greece,” she wrote for Reuters, with reader comments at the end. The following link will also take you to the original article she wrote.)

An open letter to Puerto Rico Governor Fortuño

By Cate Long
MARCH 13, 2012

Cate Long
I’m Cate Long and I write about the retail fixed income markets including municipal bonds. My primary interest is creating tools and systems to help retail investors understand bond markets. I’ve worked for a number of years with industry standards organizations, regulators and Congress to help craft a more transparent and fair framework for investors to participate in the fixed income markets. I'm a guest contributor to Any opinions expressed are mine alone.
Dear Governor Fortuño:
I wanted to write you to discuss the condition of Puerto Rico’s economy and its municipal debt load. After I wrote a column last week entitled “Puerto Rico is America’s Greece,” I was surprised to see the piece get a lot of attention. What I said has been common knowledge in the U.S. bond market for some time, and the facts that I brought up have been previously pointed out by the major credit rating agencies. For those in municipal bond markets, I wasn’t really adding much that was new to the conversation.
But it turned out the attention my piece was getting was from people outside the bond market. Those who were responding to it were those who love Puerto Rico and are concerned about its future, namely its citizens. They seized on what I wrote and passed it around on Facebook. Newspapers like and blogs picked it up and debated the fine points of the island’s unemployment rate and deficit spending. I’ve never seen anything like it in the United States.
Now, before going any further I need to mention that I made one mistake in that piece, which I did not discover until I read the rating agencies’ reports about the commonwealth. Your constitution requires that bond principal and interest be repaid before your government can make any other expenditures. That means bond repayments take precedence over payments for education, healthcare, government-worker wages and pensions. Bond markets cheer for this, of course, but I’m not sure that your citizens are entirely aware of it. Michael Corkery of the Wall Street Journalalso wrote about your bond offering last week and didn’t mention the seniority of payments that makes your debt so appealing to investors.
Aside from that error, I stand by everything I wrote in my earlier post. If you don’t want to take my word for it, take a look at what the rating agencies have to say. They are typically pretty blunt in their assessment of the fiscal condition of states and municipalities. Here is what Moody’s said about your recent debt offering in a report on Mar. 6 (emphasis mine):
The commonwealth’s general obligation bond rating (Baa1) has been pressured by continued financial deterioration of the severely underfunded retirement systems and weak finances, with a historical trend of funding budget gaps with borrowingFurthermore,while the administration has taken steps to control spending and move toward structural budgetary balance, needed retirement system reforms and the increasingly heavy debt load could exacerbate strains on the commonwealth’s economy and budgetary finances in the coming years.
The debt service payments were initially made with advances from the Government Development Bank and bond proceeds will be used to repay those advances. This is essentially deficit financing and follows the $600 million deficit financing in fiscal 2011.
Here is Fitch’s take on the latest financing, from a note dated Mar. 5 :
HIGH DEBT LEVELS: Debt levels are very high, partially reflecting the consolidated nature of the central government’s role, and have increased as the commonwealth has used deficit financing as part of its fiscal stabilization plan.
And on Mar. 8, Standard & Poor’s said this:
In our opinion, the practical and political ability of the administration to rely exclusively on expenditure cuts to balance the budget in fiscal 2013 is relatively limited, given the depth of the cuts already adopted, and the potential for additional expenditure reductions to hamper what remains a relatively anemic economic growth.
Many governments use deficit financing, although this is rare among U.S. state and local governments due to constitutional limitations. Deficit financing works when an economy is growing and can service higher debt loads in the future. But Puerto Rico is barely growing as islanders move to the mainland and unemployment is stuck at very high levels. Critically, the government has only saved enough funds to pay approximately 9 percent of pensions (page 184) that will be due in the future, unless substantial contributions from your overstretched budget are diverted there.
The unemployment situation is the pivot point on which all your economic activity turns. Here is a10-year chart on Puerto Rico’s employment figures from the Bureau of Labor Statistics; it looks bleak for people needing jobs in your commonwealth:
You have raised taxes to bring in more revenue, and you have reduced the size of the government. I’ve studied what Juan Carlos Pavía, the director of Puerto Rico’s Office of Management and Budget, has done to rationalize and get better control of government cash flows. These are all useful and positive actions. But it still comes down to the need for your economy to grow to support your increasing debt load. Instead, the numbers show the economy is barely growing. I’ve read in many places about a large shadow economy, but it’s hard to collect tax revenues to support bond payments from economic activity that happens outside the official sector.
Governor Fortuño, I could go on all day citing rating agencies and U.S. fund managers who do not own the debt of Puerto Rico and will not because of the instability of the fiscal trajectory. But you have already lost this war when your cronies attack me and call me names rather than engaging in dialogue on these complex issues. I’m not the enemy, Governor Fortuño. I’m like the child watching the parade who says: “Look! The emperor has no clothes.” And it’s clear to many that the emperor indeed has no clothes.
 Cate Long
Ms Long:
I would like to thank you for your posts and honest opinion on the economic issues currently affecting our Commonwealth. I wish more news services would take your objective facts and illustrate my fellow citizens with a reality check.
The largest problem with the PRGov is that tribalism takes over and no one likes bad news. Specially politicians running for re-election from all tribes.
It has been easier to sweep all this structural problems under the rug and tell everyone that all is fine. However the accumulated dust under the rug is so much that we can no longer ignore it. Articles such as yours illustrate this problem with hard figures that as customary don’t make it to the citizens and voters.
My last comment is to anyone from PR who may read this. When you tell a lie to yourself and repeat it over and over again. You’ll end up living it and believing it as fact. Remove the shroud from your eyes and don’t live a lie. GET THE FACTS, THIS ARTICLE HAS MANY ALL EYE OPENING.
Thanks, Ciudadano de San Juan
Posted by CiudadanoDSJ | Report as abusive
Good reading, a lot of those things are pretty logical and are right out there in the face of everyone. Sadly a great amount of people in this country decides to ignore whats really happening and choose over their fanaticism to politics. For them what their leaders tell them its their reality.
Posted by Frank_QWERTY | Report as abusive
Palabras con luz! Thank you.
Posted by LAL85 | Report as abusive
I wish all people that live here in the Island could read your letter and maybe pay attention to our precarious economic situation. Even though these same issues have been said by other people here many don’t want to believe or recognize the problem because they are categorize as “political statements from Fortuño’s enemies”. As “puertorriqueño” I thank you and appreciate your objective and candid view.
Posted by Davidsebastian | Report as abusive
I am from PR and Ms. Long is accurate on her analysis. Mr. Fortuño has issued in these 3-1/2 yrs over 20 billion, yes billion dollars of new debt.
Posted by JoePR | Report as abusive
My only regret to this letter is that it’s written in English. Most people who should read this, blindly vote for governors who pillage puertorrican values and pockets with lies and half-truths; and unfortunately these puertorricans, in the most part, don’t speak the language of their colonizers.
Posted by Malvar | Report as abusive
Posted by troy007 | Report as abusive
I like you! Thanks. He (the governor) is really naked!
Posted by diegoduey | Report as abusive
Hi Ms Long
Thanks for say the true about the reality of the economy in Puerto Rico. We have a goverment that spend the few money that we generate and produce in give contracts to the people near to the governor and in things that don’t change our lifes for better.
I live in the island, feel every day the chaos and we can say nothing because the stablishment throw the police and politics againts us. THANKS.
Posted by Maripamoralessc | Report as abusive
Hi. I feel very proud for write about the economy of Puerto Rico, but You only what its said in “paper”, I invite you Miss.Long to visit PR, and would that everything you present in your write its WORST. This administration every day lie to the poeple they want to be the next 51 state, but dint know at least the history behind the independece war of US, they said they want to be next estate 51 of US but dint know at least to speak english, mean while they siad they believe in the democracy, but you know how they react when some one step up and came with the fact. Im a student and are doing everything necesary to destroy our education and the same time our future. Please dont stop to write about this type of administration, I prefer if some inside of Puerto Rico, came up with the same objetivity but there’s no one. Thanks and dont quit.
Posted by ecad | Report as abusive
This government thrives in misinformation and so will deny anything that would make them look bad.
Posted by Strigoi | Report as abusive
I wish the Obama administration come to P.R. and remove these clowns from our goverment Puerto Rico is in really bad shape because Fortuño and the likes and the worst part is they are not humble enough to accept any sugestion from anyone to help fix the island economic troubles. Please Don’t stop writting these kind of articles maybe someone will do something to help us. Keep up the great work.
Ernie J.
Posted by seriouskid | Report as abusive
Mrs Cate;
I hope it was you that came to a talk show in PR to comment about your post. Just to let you know, the two commentators are lawyers and after you hung up, they dismissed your opinion for not having the expertise nor the preparation to have a clear opinion, thus the questions about your preparation and expertise. I am sorry to say that the listeners barely speak English and took their comments for granted.
This is the problem we have in the island. There is a cloak of misinformation and half truths that are keeping my people in a 21st century obscurantism.
I appreciate your comments and hope that you are better prepared to deal with these situations in the future. Diaz Olivo and Pabón Rocca are politically biased and won’t take an opinion from an outsider.
Please keep it up, we need more information of these level in the future.
In case you may ask, I am pro-independence and belief that sovereignty will give us the tools to turn this country out from Plato’s Cave.
Posted by Jaime2012 | Report as abusive
Dear Ms. Long : Thanks, that is our reality, more worst impossible. Thanks.
Posted by RosaGarcia | Report as abusive
Respect. I was critical of your last post and the harsh allegations. You have done your research and corrected your statements regarding the security of payments towards the debt service. Great job on this follow up post.
Posted by Pepfre | Report as abusive
And this is what happens when people decide to take a dive without knowing how deep the water is… Gov. Fortuño is such a joke!
Posted by JPPMD | Report as abusive
Thank you Miss Long for exposing the truth about our frail economy. I apologize in the name of all the decent people in Puerto Rico for any attack or insults you may have received in response to your letter, but that is the “style” in which this administration reacts to criticism. Unemployment is at an all time high, but not for everyone on the island, and certainly not for Fortuño’s friends and colleagues, who have been awarded multi million dollar government contracts while tens of thousands are on food stamps and having their homes foreclosed. There is no worse blindness, than those that do not want to see.
Posted by jcb45 | Report as abusive
Oh, you made another blog! Cool!
Keep studying the situation. You might find some clues and figure out if “the shark emperor” is as tough as the citizens think he is, well he is not and we will not join him!
It is like User ecad says: visit the island.
Posted by turismoP.R. | Report as abusive
Ms Long:
Please have one of your Reuters colleagues translate this into Spanish. That way it can reach more people in Puerto Rico that need to see the truths that your article highlights.
I do not trust the highly polarized Puertorican media to do a fair job of translating your letter and its replies without adding any corporate or political slant to it to further their own agendas.
Thanks for your efforts; all of us are happy to see this. Mr Fortuño and his cronies’ “anger” only confirms to us that what you are doing is the correct course of action.
Best Regards,
A. Ortiz
Posted by ALOrtiz | Report as abusive
Governor Fortuño is a phyco lier, an extremly unsecure man. I don’t belive nothing that he say. Thanks lady, we need people like you: honest contributor of humand causes.
Posted by cuquilugo | Report as abusive
Politicians should be more concerned about working for their countries instead of assassinating the opinion of others. Ms. Long, good article, better letter.
Posted by FirmbutFair | Report as abusive
Words with light and wisdom from a lady… yet when I talk things like this to my fellow puertorricans they look the other way saying the contraire, obviously they just repeat what our leaders say …Demagogy anyone?? Thanks Ms Long for saying the things not many of my countrymen are willing to hear or accept..hopefully they will, I just hope its not to late when we do!!
Posted by TheLoanOfficer | Report as abusive
I appreciate your report, and I beleive that most of the puettorricans who undersatnd whatyou are talking about appreciate your comments and reports as well. What you pointed out, is well known in the island and unfortunately not enough has been done. The most important thing of your letter is when you mentioned that bond P&I have to be repaid before anything else is paid. I assure you that 90% of the resident of PR have no idea of the repercussion of this. And it is important that true puertorricans who love this beautiful small island understand and pass thru what could be our future in less than 10 years. I heard analyst and FAs here saying that this woukd explode in less than 7 years. That means IN 7 YEARS THERE WOULDN’T BE ENOUGH $$$ TO PAY! One last thing, governor Fortuno’s brother use to be one of the most important traders in UBS, which happens to be the major holder of PR debt and the first player in the business of underwritting in PR .., any coincidence?
Posted by La_Realidad2 | Report as abusive
Cate Long! call the polices , call the polices we look like Mexicans, we are so sorry we are American citizens sorry.
buajajajaj poor ladie!
Posted by stocksview | Report as abusive
Dear Ms. Long:
I guess you must realize by now what people mean when they say Puerto Rico is subject to “political tribalism.” Unfortunately the island is divided into factions that: 1) hate each other deeply; and 2) rather sink than work together. Thus, the national consensus required to tackle the problems you point out will not materialize any time soon.
It saddens me that many educated people on this island would resort to petty finger pointing rather than rising to the challenge. Also, it is embarrassing that people would attack you personally rather than attempt to debate in a civilized manner. Nonetheless, that’s how it is on the island, critics are persecuted and tyranny is rampant.
If only U.S. Congress would answer once and for all the most crucial of questions: will Puerto Rico ever be invited to become a State of the Union? That is the question that remains open, allowing political parties to center the public’s attention on the obsessive debate over P.R.’s political status, ultimately obstructing any significant debate regarding monetary policy.
In this year of elections none of what you have talked about will sway votes. The political parties will make sure of that.
Best regards,
Javier Villar Rosa, JD
Posted by eltarot | Report as abusive
You have done a correct analysis of the current Puerto Rico Government financial condition, but also the economical situation of the common citizens in PR is in a great down turn, compared to just a lustrum ago. The decision of the Fortuño’s government in 2008 to dispose in mass of around 30,000 public employees collapsed the job security that had historically escorted that segment of our population. Those that were not fired, naturally became afraid of being the next layer to be removed, and obviously have refrained from further investment in our economy. This explosion in the heart of our main employer, the government, have had dramatic detrimental expansive effects on the private sector. And this current terrible situation of our country is being continuously denied by Fortuño and his allies, many of whom have become millionaires in three years. Inversely to reality, he is boasting in the US as the savior of the alleged “financial perils left by the former government administration”. The problem is that some people are believing the illusion being sold; they are seeing the naked emperor of the parade as very well vested.
Posted by Chiararodz | Report as abusive
Let revolution begin!!!
Posted by donjuanelguru | Report as abusive
Let the Revolution Begin!!!! Greece is an understatement…Now lets eliminate food stamps and we have a civil war…it has to happen for the greater good!!!
Posted by donjuanelguru | Report as abusive
Ms Long: It’s very interesting the information that appears on your article…we are dissapointed in the island with the Goverment of Mr. Fortuno because they took ABOUT 20 BILLIONS DOLLARS in new debt most of them to be repaid for FORTY Years (until 2052) and this is daunting…The reality is that the Governor’s wife (a lawyer) with wages of $60,000 per year goes up to $600,000 per year and they are getting richer.. but the people of Puerto Rico are suffering high unemployment rates,an increase in criminal activity and NO concrete plans from the goverment…
Posted by Lobito | Report as abusive
Algo que la Sra. Cate dejó omitido en su magnifico reportaje es que en gran parte de esta crisis y debacle económica es responsabilidad del gobierno de los Estados Unidod por mantener esta relación tan nefasta y beneficiosa solo para los Estados Unidos. Vean este reportaje en You Tube: Boricuazo en El Circo de La Mega 17/2/12
Posted by JAMNPR | Report as abusive
Thank Mrs. Long. Im frustated seeing how our goverment is spending money trying to hold on to their seats by borrowing money to satisfy their own misgivings.The problem is that both parties that have changed seats in the last 20 years have done the SAME. EVERYTHING here dances around votes and friends of the parties. I really hope that the people that vote open their eyes and look for new ideas to help get our island out of this money frenzy..recently i saw the movie Inside Job and can relate to what is happening here…THANKS Mrs. Long
Posted by HVega | Report as abusive
It’s time the nation stopped kidding itself.
Posted by vdleon | Report as abusive
Ms. Long: Thanks again for crunching numbers ,for those of us whose spheres of the brain don’t seem to quite work like those of financial wizards like you. Regarding the Caribbean mystical disciple of Hollywood cowboy Ronald Reagan a.k.a. Governor Fortuno, his problem is basically that he’s yet to realize that folks like Noam Chomsky, Joseph Stiglitz and John Pilger, live in the same planet he does. In other words, Fortuno has yet to realize that the crisis of capitalism is structural, and it is permanent. With that in mind I humbly beg forgiveness of commentators that still worship the tenets of Adam Smith and Milton Friedman, and if you fall in that category please help yourself as well. Myself, I woke up a while back and realized that neoliberal capitalism can’t do a rootin’ tootin’ thing for the future of us living in Latin America. And if memory serves right, I believe Puerto Rico being in the Caribbean, also falls under that category.
Posted by ArielFornari | Report as abusive
You guys are all jealous!!!!Puerto Rico is the new Disneyland according to Fortuño!!!!!!
Posted by Puertoricanguy | Report as abusive
Ms.Long may have a point and it is worth her discussion to bring this up to investors and to the politicians who make these debt decisions and the citizens who will eventually foot the bill. PR is an interesting case study as it is a colony of the United States. One of last remaining colonies in the modern era. PR is dependent on the US and as she points out the wealthy in the US seeking higher returns +5% are dependent on PR debt. Plain and simple. After living and working in PR for over 15 years, most working with the Treasury Department it was pretty evident that the party was coming to an end with PR cash flow issues arising during the administration of Silla Calderon and continuing through the next administration. Fortuno has made the tough decisions, but it is an election year and no talk of austerity will be mentioned now. The general fund has been running out of funds to cover payroll in March of each fiscal year since 2004. Just look at the transfers each month to cover payroll it is like a tennis match. Don’t even ask how pensions are funded! Too many special pension laws to pay retired employees without significant increases in contributions have only depleted pension funds. But sell more assets for the common good seem to be the lesser of two evils. PR does have economic advantages, strong Financial Services sector and highly educated would be key advantages but most folks are taking the money and leaving the Island – latest census confirms this. PR needs to stop the brain drain and capitalize on its advantage to attract capital. Mind you the state department is reporting 10K new business created in PR. The only problem is how many billionaires has PR created?
Posted by MiguelConway | Report as abusive
Outstanding report! Thank you for throwing out there the truth about this not so true grow in the island economy. Fortuno, on his desire for a position in the federal government, lies to the people in the island. Thanks again for bringing up the real economy status.
Posted by RateloPR | Report as abusive
Ciudadano de San Juan, you and the article posted by this blogger are what we call “toros pupo” and in plain Spanish: Bull Shit
The article is only criticizing the governor of Puerto Rico without considering the “debacle” caused by your PPD administration.
Just imagine how Puerto Rico would be today if your previous governor Anibal Acevedo Vila had won again.
Wake up.
Posted by luisenda | Report as abusive
it’s the commonwealth political system it self the fact that doesn’t allows any economic growth.
with things like the “cabotage” laws that impose significant restrictions on Puerto Rico commerce and the sovereignty relied on the US congress where PR has no vote, those are things that the states are you subjected to, so you’re statement about PR being the Greece of the state is not exactly right.
living in PR is so expensive that no millionaire person can afford to live in here, just a few like the owners of the el nuevo dia (I’m not kidding).
So as you said, “with a historical trend of funding budget gaps with borrowing”, that means that this problem it’s not a “Fortuno alone” fault…it’s more than that…is poverty by design.
I could go on all day just to conclude that Fortuno lost this war to the system as all the others before him, but I’m like the child watching the parade who says: “Look! The new emperor has no clothes…again.” And it’s clear to many that the emperors after him will indeed have no clothes, because the Senate have em’ all.
I’d be glad that you could analyze that for us someday.
Posted by JerryEspada | Report as abusive
Iam speechless. Thanks Mrs. Long we need people like you that take the responsibility to say the right things in the right moment!!
The criminality,thefts, burglary, and mental health is in deprivation!! How could this Government make this kind of horribly decisions so detrimental to the people of PR.? We are living in so mental state, we cannot go outside, nor even take a tour around the island because now everyday the people are killing each other from car to car, no matter how many people are on their way.! We are afraid everytime we go to make our errands!. and now I locked myself because of thiefs everywhere.!
Posted by Rosinka | Report as abusive