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.