Federal Reserve

Fed's Dudley sounds alarm over Puerto Rico's high debt load

A man walks past a vacant building in the Santurce neighborhood of San Juan, Puerto Rico.
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New York Federal Reserve Bank President William Dudley warned Puerto Rico about its growing debt load and questioned if the island can sustain its high level of borrowing in remarks delivered to an accounting group on Tuesday.

"Persistent deficits in the Commonwealth's fiscal accounts as well as mounting deficits in the operation of the several major public corporations have substantially raised the island's overall level of public debt and led to serious concerns about whether the island's fiscal position is sustainable," he said.

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He added the bank is working on a report that will "examine the factors leading to the sizeable buildup of public debt on the island and the key variables that will determine its future trend."

During questions after the speech, Dudley declined to speculate on whether Puerto Rico would default, but did say "the next three to six months are going to be very, very important."

He also would not comment on restructuring. Some believe the island cannot turn things around without restructuring its $70 billion in outstanding debt - a move akin to filing for bankruptcy - and in the spring Puerto Rico hired Wall Street restructuring consultants.

"The time is right to make some of the tough decisions," he said. "You can be in a much better place even six months or a year from now."

Earlier this year Puerto Rico sold $3.5 billion bonds in the largest junk deal ever in the U.S. municipal bond market, and its Government Development Bank could soon have to step in to provide liquidity to the territory's power authority, which is facing the expiration of lines of credit. Last week, Standard & Poor's followed Fitch Ratings and downgraded the power authority's credit on worries about its liquidity.

Last month Puerto Rico Governor Alejandro Garcia Padilla signed a law to lower energy prices, stabilize rates and embrace renewable energy.

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Dudley said the reforms were "positive steps" and could help attract business to the island.

But he suggested Puerto Rico seek ways to strengthen the financial performance of its corporate-like agencies, called public corporations.

"A major difference between Puerto Rico's balance sheet and those of the states is the presence of large, heavily indebted, corporate-like entities that continue to lose money and increase borrowing," he said. "For any financial reform agenda to be successful, it must confront this issue head on."

He also suggested lowering barriers to job creation, reforming the territory's tax system and improving its financial reporting. He said the territory could benefit from adopting the financial practices of states.

Dudley also broached seeking exemptions from federal regulations such as the minimum wage.

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Last week, Padilla signed a law declaring a fiscal emergency in Puerto Rico, which has suffered from years of population and economic decline. The territory's budget is making its way through the legislature, and Dudley said the current push for a balanced budget could constrain new debt issuance.

--By Reuters