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- [00:10]
A
Hello and welcome to a very, very special Puerto Rico edition of Sleep Money, your guide to the business and finance news of what is the IMF spring meetings week. I am in D.C. where lots of meetings are going on. My name is Felix Salmon. I work for Axios and Axios is where I am recording this podcast with an incredibly special guest. We have, as usual, Emily Peck of the Huffington Post.
- [00:43]
B
Hello.
- [00:44]
A
We have, as usual, Anna Shymansky.
- [00:47]
C
Hello.
- [00:47]
A
But most excitingly, we have Natalie Jaresco. Natalie, welcome to the podcast.
- [00:54]
B
Thank you so much. Thanks for inviting me.
- [00:56]
A
Natalie, what is your current. It's got a very long title, so I don't want to get this wrong.
- [01:02]
B
I am the executive director of the Financial Oversight and Management Board for Puerto.
- [01:07]
A
Rico and the job before that was.
- [01:11]
B
Minister of Finance for Ukraine.
- [01:14]
A
So that is quite an astonishing resume. We will talk a little bit about how you managed to find yourself running the finances not only for Ukraine, but also for Puerto Rico. That's kind of amazing. We are going to talk about how you are planning to sort of transform Puerto Rico, how you did transform Ukraine, how you did both of these in the face of incredible natural, what the economists would call exogenous shocks, whether they're wars or hurricanes, and how you do it all, even in the face of popular opposition. All of that coming up on Slate Money. So, Natalie, let's start with you have one of the most amazing stories in international finance. And I think we just need to start a little bit of personal you grow up in Illinois, right?
- [02:06]
B
Suburbs of Chicago.
- [02:07]
A
Suburbs of Chicago. And then one morning you wake up and you're the finance minister of Ukraine.
- [02:11]
B
Yeah. It wasn't just one morning. I'm older than that, but it's a long story. I grew up child of immigrants. My family came to the United States after World War II, fleeing the Soviet Union at the time and grew up in a kind of traditional middle class family, conservative parents. My college was chosen by my dad, unlike how I did this with my daughter. He said there are two colleges at the end of the train, one on this side, one on that side. Pick and I'll pay for your college as long as your degree translates into a job. So accounting, accountant, engineering, engineer. None of this. History, English, what's that? So I studied accounting at DePaul University. But I had this kind of burning love for public policy and this belief in kind of the American dream and what it did for my family. And certainly I had juxtaposing that how communism had failed my ancestors. And so kind of behind my dad's back, basically, I studied political science. He didn't notice how many classes I was taking. As long as the grades were okay, it was fine with him. And then, you know, he thought I would become a lawyer. And I applied to law school, got on a couple wait lists, got accepted to a couple. I got accepted to Georgetown, where I spoke this week. And then I saw an introduction to a program, a joint program, an MPP master's in Public Policy and Law at Harvard, at the Kennedy School, and at the Law School. And I thought, wow, that would be great. You know, I could be a lawyer, but I could do public policy at the same time. I didn't get into Harvard Law School. I was waitlisted. So I applied to the Kennedy School. I got in, and I started the MPP program. And after accumulating quite a bit of debt because my father stopped paying for my school because he had such a problem with me going to a school of government, which my father equated to Communism, and the Kennedy School of Government made it only one degree worse than that for him. I decided that I just wanted to move forward after the degree and get a job. And this was the period where the Soviet Union was kind of picking up with perestroika and glasnost, and there was this reform happening within the Soviet Union. And I ended up leaving Kennedy School without a law degree and going to the State Department and working as a presidential management intern then in the Soviet office on economic issues, which were brand new, because we really had a relationship with the Soviet Union that was based either on refugees or on nuclear weapons. There was really nothing in between prior to perestroika and Gorbachev. So I spent some time there. And then while I was there, the Soviet Union fell apart again, not something that, even as a Ukrainian, I had ever expected would happen, but it did, and it happened peacefully, which is a blessing. And then the United States opened up all these embassies in the new countries, and as a Ukrainian speaker economist, they said, why don't you go out to our embassy, our new embassy in Ukraine, and be the chief economist? And I said, okay. So I went out there and spent three years. And generally speaking, you know, I loved the country, I loved the culture, I loved being able to marry the two, the United States and Ukraine. But government work kind of seemed like we were all just saying the same thing and nodding our heads, and nothing was really happening on the ground. And I kind of got tired of traditional diplomacy not working. So rather than go back to Washington, I decided to stay And I had the opportunity to manage a private equity fund that was established by the US government. So it was $150 million of US taxpayer money to invest in small and medium sized businesses in Ukraine, Moldova and Belarus. And I thought, that's a much better thing. We're going to. Instead of just talking the talk, we walk the walk. We'll build businesses, we'll show that capitalism works, we'll show that corporate citizenship can work, that companies can actually be a beneficial part of society. And so I did that for quite some time and did it to the extent, well, that eventually our management team spun out, formed Horizon Capital, which was a private equity, private private Equity Fund. In 2006, as the economy grew, we were able to convince investors that, you know, we understood the market and we could make money for them in this marketplace. And then I raised two funds privately. The last fund we raised in 2008 was about $390 million. And it's traditional kind of North American, European institutional investors, university endowments, pension funds and so on. But by 2008, the economy in Ukraine kind of stood still. We were going through the after effects of the Lehman crisis in Ukraine, the banking crisis, liquidity crisis. And then on top of that, it just continued to get worse until in 2013, it turned into a revolution. And that revolution by 2014 turned into the president at that time fleeing the country to Russia. So President Yanukovych fled. And at the end of this revolution, the revolution of dignity, the economy was a complete disaster. They had held a fixed exchange rate in place for quite some time, which was very uncompetitive. So when the exchange rate was allowed to float, there was a devaluation of some 65%. And just as that was coming to an end, this revolution, Russia occupied Crimea and by summer they had invaded and occupied part of eastern Ukraine. About 7% of the territory of the country, about 20% of GDP was gone. So on top of the basic problems that the country already had, we now were in a free fall off the financial cliff, fiscal cliff. There was less than a month's worth of reserves in the central bank. Currency was plummeting. There was at the time that the former president fled the equivalent of about $100,000 in the treasury for a country of 45 million people. A new president had been elected post revolution. And he happened to have been a competitor of mine in the private equity portfolio. So I had invested in an alternative confectionary company, candy company, chocolate company, and he was the big chocolate king, which is what his nickname Is. And he had competed with me. So we knew each other for a decade or so from competing in business and generally in the business sector. And he turned to me in November and said, could you please become Minister of Finance? We need to pull together an international package. We're falling off the cliff. You know, I need somebody to help. They offered me Ukrainian citizenship, and I took the job on December 2, 2014.
- [08:16]
A
That's amazing. So in the speech that you gave at Georgetown, you said that what you've seen in Puerto Rico and also in Ukraine is the, I guess the deleterious effects of debt on the population, how that can really hurt people. And I want to, I mean, just in terms of this story, you took out a bunch of debt to go to Harvard, which worked out okay for you. And then amazingly, you ran a private equity shop, which, you know, back before it was rebranded as private equity, was known as leveraged buyouts.
- [08:50]
B
We didn't use leverage.
- [08:52]
A
You had.
- [08:53]
B
There was no access to leverage.
- [08:54]
A
You had a private equity shop without any debt equity. It was just a pure, pure equity shot. So, but, so tell me about the sort of upsides and the downsides of debt and what happened when you came into Ukraine with, and you just found, what was it, $70 billion worth of liabilities or something like that. And did you feel like this, it wasn't me who borrowed this money. Why should I, like, you know, I can't see any particular benefit from all of these billions. Like, we've just had a revolution. Why on earth should we pay any of it back?
- [09:27]
B
No, that was not, that was not at all my perspective.
- [09:30]
A
So why didn't you think that?
- [09:31]
B
So, first of all, I want to clarify. I don't think debt is bad. I think debt that's misused, abused, not well invested is bad, and it puts an enormous yoke on the backs of people. But look, I think debt can also be, and I said this in my, in my remarks, I think debt can promote growth, and debt can be very positive, and you can leapfrog by the appropriate use of debt where it becomes inappropriate, and this did happen in Ukraine and has happened in Puerto Rico, is when it's used to finance operating deficits, it's used to avoid controlling spending or to avoid making very difficult choices about priorities. I think when it's used for infrastructure, when it's used for investment, when it's used to support and grow an economy, it can be a positive thing. So I have nothing against debt or in my personal case, to finance my education, and I have zero problem with repaying debt either. What I think the challenge on the sovereign situation, which you think is unique in Ukraine's case, is given the devaluation, given that we were restructuring a perimeter of about 22 of that seven and it was dollar denominated, euro denominated, it becomes unaffordable because of this, the devaluation and the lack of competitiveness in the economy. And I think at that point, the restructuring was necessary because you're so deep underwater that you have to make choices of either not paying your pensions or paying your debt. And I think it's better to restructure the debt. I don't. I'm not saying to pay nothing, but to restructure the debt so that it's sustainable.
- [10:56]
A
I guess my question is, once you've realized you can't pay the debt back, once you've realized that you're effectively going to have to default on your creditors at that point, why would you want to maximize the amount that you give them? Wouldn't you want to minimize the amount that you end up giving them?
- [11:14]
B
I think you want to do what's reasonably fair and affordable. So, no, I don't think it's a game of minimizing. You want to do what's sustainable. Look, there is a contract there, and markets respect those who respect contracts and markets are a necessary tool to grow and a necessary tool to recover from your economic crisis. And you can't ignore that reality. So I think ignoring the reality is as harmful. You know, defaulting and just not paying is probably, I think not paying anything, I think, is extremely harmful. I think there's more to it. In Ukraine's case, in Ukraine's case, there was a very specific set of targets that had to be met that were defined by the imf. The IMF defined our economic options. At that point, there was no other economic option for Ukraine other than the IMF, which brought with it a G7 package. And they defined out of this $40 billion balance of payments and reserves gap that they projected over four years, that we all projected over the next four years, that 15 billion of that had to come from the private sector. In other words, the public sector was going to do a part of it. They were going to do the 17 and a half at the IMF and the seven and a half bilateral, multilateral. So 25. But the other 15 they weren't going to do. They wanted everyone to have a hand in this recovery.
- [12:30]
A
And that 15 billion didn't come from people giving you $15 billion. It came from people accepting $15 billion of, like, reduction in how much you paid them back.
- [12:40]
B
Reduction in debt service over a period of time. Exactly.
- [12:42]
C
Yeah. And I mean, I know also the, you know, the IMF has done some work on this, looking at where you've had more contentious debt restructurings and where you've had kind of friendlier and, you know, they have definitely shown that when you have friendlier restructurings, that where everyone ends up, you know, in the grand scheme of things, somewhat okay or somewhat happy, you have a much quicker return to growth. You don't have the same effect on exports. And so, you know, I do think it. While I can understand why people from the outside sometimes say, like, well, why don't you just pay back nothing? That doesn't really work long term.
- [13:17]
B
I agree. And I think the other extreme is also not true. I think we need to watch that. The other extreme is, you know, when you, when you sit down to restructure debt, the creditors will often say, look, no haircuts. You've got only a liquidity problem, not a solvency problem. Let's just reprofile this. Let's just move it out. We'll give you some more money and it'll all be okay. And what they threaten is if you do do a haircut, if you do restructure the debt, you'll never be able to reenter the markets. And that extremism isn't actually either.
- [13:45]
A
If you look at every single country that has ever restructured its debt, they all come back to the market. It's a bit like once you've declared bankruptcy, that's when all of the credit card companies are like, you know, showering you with offers because starting over again, you have no debt. It's great.
- [14:00]
C
I'm curious about with the IMF package. A lot of that came with a lot of very important reform measures that I know you, you were pushing through. And I just. If you could talk a little bit about engaging in some austerity measures during a time of a country that's also at war.
- [14:14]
B
So I don't look at it and I don't. I really dislike the term austerity. So I look at it as making very important fiscal choices. I hope that I've never been the source of austerity, neither in Ukraine nor in Puerto Rico. But I do think you need to make very difficult choices when you know the window is closed for debt. And again, if you've been using it to finance operating deficits, you're already up against a difficult wall. And then on top of that, you have a crisis in Ukraine. We had a war in Puerto Rico. You have other crisis after the hurricane. And all of a sudden you really need to rethink and relook at how you spend the very valuable resources that you do have at the table. And I've had to do a budget where I have to cut everyone across the board because we needed to increase a military budget. And the choice literally becomes with agency heads, all right, if you're not gonna provide me how to reduce your budget so we can transfer that portion of our valuable resources to the military, right now, I'm gonna walk outside with you to the press, and you're gonna tell them that you're refusing to provide your 1 1/2% cut for the soldiers who are on the front. And they're not gonna have helmets or they're not gonna have shoes or they're not gonna have ammunition. Let's go out there. I'll hold your hand. Let's go. And, you know, no one's willing to do that when you have to face that choice. They're not willing to do that. But the IMF program came with a whole wide variety of reforms. There were prior actions that had to be taken before they'd even consider a first tranche, and then there were, for every tranche, a whole series of conditions. In addition to that, we had, you know, a credit guarantee from the US which came with its own conditions that had to be met prior to getting the money. Then there was the EU Macro Financial Assistance Loan, which came with its set of conditions. We were also in the process of trying to get the EU visa free regiment that had 400, over 400 conditions that had to be met. Literally, it was like a wall of conditions that you had to meet for all of these different entities and all of these different things to come together. The reforms, though, were some of them, again, were not austerity as much as they were changing the way you do the business of the country. The biggest one in Ukraine was moving over time making a big jump right away to market prices for natural gas, for heating, and in doing so, then putting in place in the budget a program to finance the most needy who couldn't afford that increase in pay. But you would do it on a needs based, needs tested approach. And that was hugely. You can only imagine, we increased prices 400%. If your heating bill was 400% greater one season, can you imagine what that looks like to people?
- [16:38]
A
Yeah. Especially in the Ukrainian winter.
- [16:40]
B
Exactly. It's not short, and you Know, to an extent, electricity in Puerto Rico plays that same role. The issue is that you then have to think about, you know, now that same gas company that's charging market prices is the single largest taxpayer in the budget. And so there, instead of running a deficit which was spread across those who could and couldn't afford, they're now actually contributing to other public expenditure needs, while those who are in need are getting a subsidy. And so I think, you know, it's about how you use your resources and how you make choices.
- [17:13]
A
So that's the perfect segue, I think, to Puerto Rico because you're kind of flipping the table a bit now. Instead of sitting in the government being told what conditions you need to work under in order to spend money, you are now the person telling the government what conditions they need to work under in order to spend money. And I'm really interested in how it looks like from the other side of the table, but, Emily, you had a question.
- [17:41]
D
I was listening, Natalie, to the interview you did with David Axelrod. I think it was a few years ago already. And you talked about lessons you had learned in Ukraine about the role rule of law plays in what you do and how it was, you know, difficult in Ukraine because the society was still kind of figuring law out, basically. And it got me thinking, how does rule of law compare from Ukraine to what you're doing now in Puerto Rico? Are conditions there better, worse? I know it's sort of a unique situation because, because it's a commonwealth, it's sort of in between an independent state and something else. But so I was wondering if you could talk about that a bit.
- [18:20]
B
Sure. I mean, Puerto Rico is a territory of the United States and a territory that is blessed with US Federal court systems. And so the system of jurisprudence, the system of law, is generally speaking, what you'd expect and see in the United States. And so I think from a very kind of very superficial perspective, it's tremendously different than Ukraine. Ukraine's court system is only now beginning 25 years after independence to be reformed. Yesterday, an anti corruption court was announced. Literally, I mean, it so, you know, much farther from anything, much more similar to any other emerging market or developing economy, and completely different than Puerto Rico or other parts of the United States. Felix, with regard to your kind of segue, I want to just say that I think the IMF doesn't dictate either. It's a negotiation. It's a collaboration on an economic reform program. And the only way an IMF program works is if the government that's implementing it, owns it. And so I want to start by saying it wasn't that the IMF pushed these conditions on us. In the end, yes, it's part of a contracted deal of when you get your money and the timing might be negotiated with them. But if we didn't believe in those reforms, I could not have implemented them. And just like I just described to you why raising gas prices was the right thing to do, I believe that. I think in the same situation in Puerto Rico. I'm not trying to dictate, and I don't think it's the role of the oversight board to dictate to Puerto Rico how to spend their money, but it is a collaboration and a negotiation on what the spending envelope should be and how that spending should occur. In Puerto Rico, the issue is really about transparency and about fiscal controls putting guidelines around spending, since we don't have access to debt and there's no third party in this case that's going to finance that, that deficit where you might have the IMF financing it or the World bank providing or the EU providing you some.
- [20:15]
A
You don't even have the Caribbean Development Bank.
- [20:17]
B
No, we don't. So the role of the oversight board can be somewhat like the IMF in terms of kind of laying out the program and keeping you on the program, keeping you aware of, you know, you said you were going to do this. Now are you doing it? And I find myself in that position quite often. You said you'd fin your audited financial statements March 31. Where are they? You know, I'm not going to let you forget that you made that promise and that you made that commitment and that was your plan, in some cases, it's about trying to help you do the things you want to do in government. So if the government came to us with a plan for. Right. Sizing, for shifting resources in the government, shrinking the government to the extent that, you know, demographics require that a million people, 25% of the population has left the island in the last 10 years, then how do we get there? How do we plan it? How do we measure whether it's happening or not? How do we expand on your own desire to reform? Because the best possible implementation will come when you own it. And if you don't own it, then it's a piece of paper, or if you don't own it, it's an IMF program where you never get the next tranche.
- [21:15]
C
Right.
- [21:16]
A
So, I mean, that raises the obvious question. You were a reformer in Ukraine who wanted to make these reforms and you were happy that you had the IMF backing you up and you could go along to the Ukraine and say, hey, not only do I want to make these reforms, not only are these reforms the right things to do, but we can't even do anything else because of all of this conditionality from the imf, who is the equivalent person in Puerto Rico saying, hey, I own these reforms. These reforms are wonderful. And Natalie has my bag.
- [21:46]
B
Well, I think the first part of it, you know, reform by reform, you do have champions. The former Secretary of Education was championing the education reform. That plan that's in our fiscal plan came from them. The plan for reform in the Department of Public Safety and the police department in particular came from the consultants that worked for the police department. They worked on that program together and they were the ones championing that reform and bringing it forward. The governor is championing, along with bipartisan support in the legislature in Puerto Rico, the transformation of the electricity utility company prepa. But then there's a lot of things where there's no real champion, unfortunately. And look, I mean, it is an enormous transformation that you're asking of the Puerto Rican government in a short period of time. And just as in Ukraine, perhaps there were other areas that suffered. So I was finance minister and I take credit for what I did. And you know, maybe there's a great minister of economy, maybe there was a great minister of infrastructure, but it wasn't like all 20 ministers were great. Right. You have bigger and smaller champions and that's the same in Puerto Rico. You have some that are really moving forward and you see implementation happening and you have some where, you know, they're either not as vocal or they don't own it as much, or maybe they don't even believe in it as much.
- [22:53]
C
I know you mentioned a little earlier about a lot of the population leaving and that I guess just raises a question to me about long term debt sustainability, both because of the actual outcome of the Cofina restructuring and then looking forward and saying, well, what is going to reverse a lot of the trends that we've seen to return Puerto Rico to the type of growth that they would need in order to long term be able to make this debt sustainable.
- [23:23]
B
So take that apart in pieces. I mean, the Kofina debt restructuring I think was sustainable, is and was sustainable as done based on what the demographic projections show, which is an unfortunate continuous decrease, although not in any kind of pace like post hurricane, but more than natural birth death rate is negative, as in many societies. And people slowly are leaving the island as they had previously. So just a specific piece of that.
- [23:48]
A
To be clear, the Kofina debt is basically where they securitize their sales tax revenue. And so there will be sales tax going forward, even if the population goes down. And the sales tax going forward should be enough to pay off those bonds as restructured.
- [24:03]
B
That's right, because the deal only gave them half of the sales tax collected in the first place. And so it's not like you restructured a piece of debt based on a projection of 100% of a growing number. And that's not what happened. So I think that the Kofina debt was restructured and it is sustainable with the projection. But I think the bigger issue is the issue you're asking, which is how do you stop this from happening or how do you minimize the outflow of any additional people? And to me, that's a very basic concept and it's not dissimilar, again from Ukraine, where people tend to leave as well. People want. They want the same thing in life. They want health care, they want education, and they want safety, public safety. And then they want to be able to get jobs that can put food on the table for their families and put clothes on their backs. It's a very basic set of options. And if you can't provide public safety, public education, public health and reasonable jobs, people will go elsewhere. They will look for it elsewhere. This isn't unique to Puerto Rico. It's not unique to Ukraine. Poles are in Britain, Balts are in Ireland. You know, it's what happens. The question is, how do you build an economy that will provide those things where you can afford public safety, public education, public health, and where jobs are being created that meet the needs of the people? And that's what we call in the fiscal plan, structural reforms. So you could, you could balance the budget and you could restructure the debt. You could even get rid of the debt. And that doesn't make this economy competitive. It's not enough. That third leg of the stool is the only thing that in the end will get the island back to a competitive place where it can create those jobs and finance those public education, public health, public safety areas. Otherwise you have your tax base leaving and you have a vicious cycle of inability to provide services, people leaving, inability to provide the kinds of jobs. And I think there's no end. So I think, you know, this is something that PROMESA really didn't look forward to in a big way. PROMESA focused on two goals, debt restructuring and balanced budgets. But the growth part of it, the competitive nature of the economy is not really clearly defined as necessary in the law, except for you and I and the rest of the people listening who understand that having market access means, in essence, that you gotta have an economy that can sustain debt. And so that means it should be growing, not contracting.
- [26:16]
A
So you have this. I mean, if I understand you right, basically what you're saying is there are certain things that the government needs to invest in in order to make Puerto Rico a vibrant economy. And you are more than happy to try and free up space in the budget for things which are gonna improve education, improve the electricity grid, improve the things that people need in order for Puerto Rico to work well, as opposed to, you know, this other kind of thing which you say, where you're saying, like, what I don't want to do is just have to raise debt to finance a deficit. But isn't that. How do you draw that distinction? I feel like looking from the outside, it looks identical.
- [26:55]
B
It's very hard. But it's not only about spending more, it's about how you spend money. I think to some extent, when you have access to debt and you finance your deficits with debt, you never really focus on, am I spending my money the right way? You just keep spending. Right. It's like a teenager that had a credit card that never had to pay the bills, never saw them. So they really don't make decisions about how many times to go to Starbucks, whether to buy those shoes or those. Because they're not paying the bill. And I think that's what happens from a fiscal perspective. And I think when you have to start making those choices, you start seeing that you have to focus on outcomes. So if in Puerto Rico we're spending more per student, and yet our teachers are underpaid and our educational outcomes are bad, worse than most states. What are we doing with the money? Maybe we should re look at how we're spending the money. It's not about pumping more money necessarily into it, but perhaps we ought to shift how we expend those resources. Maybe more money should go into teachers, or more money should go into psychologists and nurses. If we're having trouble with special education. I mean, you have to look at where you are and how to spend the money. If all the practice has been for decades in some governments, including Puerto Rico, is to ask for last year's budget plus some more, and you're not accomplishing the outcomes, so violence is not going down, then maybe we need to look at how we're spending It So in the case of the police, you know, what we're looking at is a program or a reform plan that takes police from the back office, from doing desk jobs and putting them in the communities. Use civilians in the back office. That costs less than having a sworn officer doing the paperwork. And it's better for getting violence levels down because they're out in the community. They get to know people, they get to, to be seen and heard. But it's how you spend the money just as much as it is how much you have to spend.
- [28:37]
C
Well, and these structural forms are obviously extremely important. And I, I guess though I, I'm still. Well, we're confused wonder like if you're.
- [28:46]
B
Thinking confusing fiscal with structural. So so far I've been talking about fiscal changing and budgets, but the structural is to me, look, Puerto Rico was blessed in some ways, I guess by having decades of a tax policy from the federal government that provided tax preferences for multinationals to come down to the island. They created jobs, high quality jobs, and they paid sufficient taxes to let us keep spending on however we want to spend. Those tax preferences started to go away and it's like removing the curtain. And behind the curtain, which no one cared to look behind the curtain before because those tax preferences were enough, it was enough. Now they're gone. We open the curtain and behind the curtain it's extremely hard to get permits, it's extremely hard to register your property. The burdensome nature of the tax system is overwhelming the labor market. Private labor market is extremely expensive and burdensome and the electricity is not reliable and extremely high cost. The human capital is not ready for the jobs of tomorrow. And those are the structural reforms that defines then these things that I said that are really not directly. I can't manage them through a budget or a debt restructuring, but I'm encouraging and they're part of the fiscal plan because those are the things that'll change the nature of the economy going forward. And if you're going to invest.
- [29:58]
C
Right, but those are also expensive. Right?
- [30:00]
B
They might be, yeah. They're about process change.
- [30:04]
C
Right. But wouldn't. Right. But wouldn't there be some concern after the federal disaster aid stops coming in and debt service payments increase, isn't there just a little bit of concern kind of in the medium to long term about how Puerto Rico can really get itself out of this decline?
- [30:22]
A
So I want to. Let me use that as a segue because that's exactly what I want to talk about next. After you start your new job and you start running this oversight Board the hurricane hits. And the hurricane, as we all know, was like the worst devastation to hit america in decades.
- [30:43]
B
100 years.
- [30:45]
A
For 100 years. And it caused absolutely enormous damage. And I can imagine waking up after that and just going, you know, all is lost. And there's something very interesting if you look at the value of Puerto Rican bonds after the hurricane, because what happens is quite naturally, they just sort of fall off a cliff. Everyone's like, oh, my God, this island has been half wiped off the planet. You're the small Caribbean island in the context of a world where such things are more and more precarious. And then what happens is people realize that in some weird paradox, this is a fiscal stimulus. As Anna was saying, there's insurance payments, there's federal disaster aid, there's money coming onto the island, and then the price of the bonds, after having gone, suddenly bounces straight back up again. And can you just explain how the hurricane, which basically fits into what you're trying to do and how bad it's been and whether there might even be a silver lining there, the hurricane is.
- [31:48]
B
The worst thing I've ever seen. I mean, I can't compare it to war, which I've also seen, which is horrendous. They're two different things. But this is a natural disaster. At least I have someone to place blame on in the war in the Kremlin. Here I have no one to place blame on. And in Puerto Rico, there wasn't a single square meter of the island that didn't get hurt, hit or destroyed. And so, you know, when you're. It doesn't matter how much money you have, doesn't matter how much money you have in the bank. When there's no water on day three, you can't buy water. There's no water because you're an island surrounded with water and you're far away. Without an airlift, you don't have water. So this was an extraordinary devastation and no one could have been ready for it. No one in Puerto Rico could have been ready for it. No one at FEMA could have been ready for it. It's a once in a hundred years hurricane. Unfortunately, you know, with climate change, we all have to worry about how often it might happen again, but let's hope not in our lifetimes or our children's. The silver lining part of it is somewhat true in two ways. One is the fiscal stimulus that you raise. If you look at the last fiscal plan projects, $80 billion in federal disaster funds and private insurance, that number seems to be going up, not down, in terms of the estimates that FEMA puts on the level of data disaster that would be eligible for federal funding. And so there's going to be a 10 to 15 year period where Puerto Rico's going to receive the equivalent of one times gnp, and that's substantial. Again, put yourself in Ukraine's position. We were discussing 40 billion, 17.5. GDP was 100 billion, and it came with conditions. And this federal disaster money comes without reform conditions, of course. So this is a substantial amount of money and it has a stimulus effect. It raises the boats for everyone for that period of time, that 10 to 15 years where funds will flow into, into Puerto Rico, whether they flow into capital or they flow into labor, either way they have some lasting effect on the island. And that means that tax revenues will increase at some level, and that means budgetary revenues increase and, and all that goes with it. So there is a small silver lining in the fiscal stimulus, but it's temporary. It's 10, 15 years. I think the greater silver lining is that used well, 80, 80, $90 billion could build a 21st century infrastructure in Puerto Rico. And so if used well, if we build a resilient electricity system, if we use these funds to build a better school system, if we use these funds to improve the ports and the airports and the ferry lines and everything else that was destroyed, and because those things had not been invested in properly for decades, as we know from the electricity system, we have an opportunity to use this as a silver lining to rebuild and have a 21st century infrastructure. But what the fiscal plan also shows is that after that funding is gone, as you just described, the economy returns to its natural tempo, its natural growth rate, which isn't enough. And that's why my argument here is that you need to use this cushion of time, you need to use the cushion of time in a growing economy. It's easier to make these difficult changes if you want to, you know, deregulate the labor market, which means there'll be some movement, some people may lose a job here or there. It's much worse to do that kind of reform in a declining economy. It's much better to do it when those same people have an opportunity to get a new job in a growing economy. And so I would say the third kind of silver lining here is Puerto Rico didn't have, before the hurricane, a cushion of time to do difficult reforms. It would have been 10 times more difficult, 100 times more difficult to do some of the reforms that are necessary today. You know, you have A cushion. You have an economic cushion. You have a little bit of a budgetary cushion because the revenues are growing, and it's a much better time to do difficult things.
- [35:25]
A
So let's talk a little bit about this electricity grid, because this is fascinating. I know, Emily, you were interested in this, A resilient electricity grid that can cope with a hurricane hitting the island. Is that also by its nature going to be greener, more renewable, or are those two different things?
- [35:46]
B
They're two different things, but they're equally important. So resiliency is important, but so is reducing the cost of electricity. Electricity is extraordinarily expensive and dirty in Puerto Rico, aside from not being resilient. And so we're really trying right now to accomplish three things. The resiliency element, which means it's not as badly impacted during the next hurricane, and that there are better options than just transmitting from the south all the way to the north, over mountains, over lines that immediately fall down during a hurricane. But moreover, reducing the cost by changing the fuel mix, which means more renewables moving away from bunker fuel to LNG in a first instance, perhaps, but solar over time, and whatever other renewables become available and appropriate for the island. And then, you know, a cleaner part of it comes with the renewables. If you're going to be a tourist mecca, you need to offer clean energy as a part of that. So I think the transformation of prepa, the electricity utility, has to accomplish all three of these goals. It won't happen overnight, but I think we're on our way. I think it's the one example of progress in Puerto Rico, again, bipartisan progress that we have seen since the hurricane.
- [36:48]
D
And, Natalie, I believe the decision was made to privatize Prepa instead of making it a public utility. Could you talk a bit about that? We had an interesting conversation about that regarding PG and E. So I'm curious, why go private?
- [37:00]
B
It's been called a privatization, but it's a mixture. It's first of all, breaking apart generation from the grid, from the transmission and distribution generation is to be what you and I would agree is truly privatized, meaning owned in private hands, owned and operated by private players.
- [37:14]
A
So if I want to come in and build a solar farm, I can do that, and I can just sell that electricity to the grid.
- [37:19]
B
Yes, you have to have a contract, and you have to negotiate that contract with someone. And that gets to the issue of who manages the grid. And here it will remain publicly owned, but it will be privately managed and operated. And why does it remain Publicly owned. I think there's cultural issues with Patrimonio and kind of that. But I think the bigger issue is specifically after the hurricane, frankly the grid couldn't receive the disaster funding if it was privately owned. If you had a private owner take it over and you gave up the federal funds, for example, then the private owner would be fixing the grid post hurricane and those investment dollars would then go into the rates which would make the electricity even more expensive than it already is, which wouldn't be an appropriate, I think, solution for Puerto Rico, neither from a competitiveness standpoint in business, nor for the everyday human beings that rely on electricity to live. So publicly owned, but operated and managed privately. Because we are all looking for improvements in the pattern of management of this public utility, former existing public monopoly and looking to LIPA and places like New York concessionaire, a long term concessionaire, properly motivated, can actually manage this in a much more effective way, we believe, than previous decades of prepa management have managed this electricity utility.
- [38:32]
D
My question I guess is a little personal. I was wondering how you're dealing with all the criticism coming your way in Puerto Rico. I feel like commentary has been really harsh and it's not surprising there would be criticism because there's this massive humanitarian crisis and at the same time, you know, you're trying to do something, you're addressing a different kind of crisis at the same time. So I was just wondering sort of on a personal level like how you manage that, because that's hard to deal with. I imagine it is.
- [39:00]
B
And it was not like that in Ukraine. In Ukraine, there was a support for doing the difficult reforms and kind of an understanding that the situation that we were in at that time was because reforms hadn't happened faster over time. You know, again, once you reach a level of stability, that criticism cuts in in any case because you're, you're touching upon vested interests and different policy interests. But I think for me in Puerto Rico, the interesting thing is we're getting criticized at the board from both sides. So you have the island saying that the board is pro creditor and you have the creditor saying the board is anti creditor. I think what that means in general, the way I explain it to myself, is that we're probably doing the right thing, coming right down the middle and trying to do what's best for Puerto Rico as a whole. We're not anti creditor, we're not pro creditor, but we're doing what's best and most sustainable for Puerto Rico as a whole. I guess it Comes back to what I said earlier, which is, I believe this is fixable. I can see some of these problems in Puerto Rico, and I can see that they're fixable. And so I'm motivated by trying to get Puerto Rico to a better place and provide better for Puerto Ricans. It's an incredible island, not just from its natural beauty, but from the warmth of the people and the quality of the people and the love that they have for their homes and their community and their culture. And it's a shame that they have to leave because they can't find that space that's comfortable for them and their families. And so I. I take solace in getting individual problems resolved, putting into the budget 10 years of back pay for police that they sued for it, back pay and promotional pay that they didn't get for 10 years from previous governments. It has nothing to do with this government and putting that into the budget and meeting with the police unions, them getting the first of the three years of those payments after 10 years, or I get. I get solace from having clarity that we just pushed through $3 million to be reapportioned in the budget to take care of analysis of 14 years of rape kits that had not been developed. So from 2004, over 2,000 rape victims had not had their kits, their safe kits analyzed. That's not only the victims, but, you know, there are probably people who've been accused inappropriately who've lived with that for 10, 14 years. So being able to solve even small problems like that. And I know it sounds small, 3 million. But it's 2,000 lives that for 14 years somehow got stuck in a bureaucracy or in, you know, whatever system, whatever occurred. Again, it's not this government. It's previous governments as well. And so I think I take solace in fixing some of these problems and helping to create a system that long after the board is gone will make good decisions for the people.
- [41:29]
D
That makes sense.
- [41:30]
A
Okay, so let's have a numbers round. Did you bring a number, Natalie?
- [41:37]
B
3.2 million. What's that? The population of Puerto Rico today and the population that I hope we can maintain by fixing the problems that we've talked about, by creating the environment where people don't leave the island at the pace that they've been leaving in the past decade. Two decades.
- [41:52]
A
So you think this is it? This is like, as low as the population of Puerto Rico is getting from here on in, it'll stay at 3.2 million?
- [42:00]
B
No, the projections are for them to continue to go down Slowly, as I said, natural death and birth. But my point is you should be able in another situation to try and stem that by having people return and or other people move to the island. So if you look at New Orleans after Katrina, yes, 40% of the population left. It's not that that same 40% came back, but others came because you attracted them post hurricane. And so I believe Puerto Rico has more than the capacity to both attract some of the people to come back, but also to attract others. And that we can at least target trying with policies and environment and choices to not have that number recede further.
- [42:36]
A
Emily, do you have a number?
- [42:38]
D
I do. It's not Puerto Rico related. It is. I just think this is the coolest number. 500 million trillion.
- [42:44]
A
Is this a black hole number?
- [42:46]
D
Yes, of course. That is how many kilometers from Earth, the black hole that we all saw a picture of this week. That's how far away it is. 500 million trillion. And the black hole, by the way, is 3 million times the size of the Earth, which is just like blows my mind entirely.
- [43:02]
B
Wow.
- [43:02]
C
And as you said, this was led by a woman.
- [43:04]
D
Yes.
- [43:05]
C
From the University of Michigan. Yes.
- [43:07]
D
Gotta stand for University of Michigan.
- [43:09]
B
If you're. Anna.
- [43:10]
A
Anna, what's your number?
- [43:11]
C
So my number is 34.5 million. So if you're thinking of who is the highest paid bank CEO, thoughts?
- [43:21]
D
Jamie Dimon.
- [43:22]
C
No, it is Gregory Garabonts who is the head of Axos Financial Inc. Which was originally bank of Internet usa.
- [43:31]
A
Wow. Okay.
- [43:32]
C
He has this bizarre pay package where he gets like a salary, then he gets a performance bonus, and then he also gets 2% of any outperformance of the, like the stock versus this index of community banks. And because they happen to have this quite large outperformance, he's getting paid more than Jamie Dimon, even though like this, this bank has $9.8 billion in assets. Like if Jamie Dimon had the same deal, he would make like $400 million.
- [44:01]
D
So Jamie Dimon has a bad deal.
- [44:03]
C
Jamie Dimon.
- [44:05]
A
We all feel a little bit sorry for Jamie Dimon around these parts. Poor Jamie, who could be making $400 million.
- [44:11]
B
That'll be his number when he comes on.
- [44:14]
A
My number is 20. Natalie and I are both in Washington D.C. this week because it's the IMF spring meeting. So one of the numbers that came out this week is that low income countries since 2013, over the past five, six years, their median government debt has risen by 20 percentage points of GDP. So it came down a lot in the sort of 2000s because of various attempts by the IMF to do that, and now it has just bumped straight back up again. 20 percentage points of GDP in just five years is clearly not sustainable, but quite what anyone's going to do about it. No one really knows we are going.
- [44:56]
D
To what country will Natalie go to exactly?
- [44:59]
A
I feel Natalie's gonna be the roving sort of, you know, she's like the Wolf man in Pulp Fiction. You know, get called in to fix the problems that no one else can fix. You'll be just say no to Venezuela. That's my advice. No, we are going to talk in Slate plus about the big constraint that people haven't been talking a lot about in terms of restructuring Puerto Rico's debt, which is the US Court system. There's a bunch of contracts here which the US Courts have opinions about. But for everyone else, Natalie Truesco, thank you so much for coming into Slate to talk to us. Thanks everyone for listening. The email is slatemoneylate.com thanks to both Jessamine Molly and Sam Baker for putting this two city podcast together so seamlessly. And we will talk to you next week on Slate Money.