(Adds yields on Puerto Rico bonds)
SAN JUAN, June 24 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
"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.
He added the bank is working on a report to "examine the
factors leading to the sizeable buildup of public debt" and "its
During questions after the speech, Dudley declined to
speculate on whether Puerto Rico would default, but said "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 $70
billion in outstanding debt - a move akin to filing for
bankruptcy - and in the spring Puerto Rico hired Wall Street
"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
Late Tuesday afternoon, after Dudley's remarks, yields on
the bonds spiked to a record high of 9.731 percent, or 84.625
cents on the dollar, in a large sale. By the end of the day,
yields hovered closer to 9.667 percent, or 85.125 cents on the
dollar, as customers bought up large lots of the debt. Yields
move inversely to price.
The yields have risen over the last week, partly on concerns
the Government Development Bank could soon have to provide
liquidity to the territory's power authority, some of whose
lines of credits are expiring. Two rating agencies have
downgraded the authority on worries about its liquidity.
Puerto Rico Governor Alejandro Garcia Padilla recently
signed an energy law that Dudley said could help attract
business. But he suggested Puerto Rico attempt to strengthen the
financial performance of its agencies, called public
"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 tax system and improving financial reporting. He
said the territory could benefit from adopting financial
practices of states.
Last week, Padilla signed a law declaring a fiscal emergency
and the territory's budget is now in the legislature.
(Reporting By Reuters in San Juan, Additional reporting and
writing by Lisa Lambert in Washington; Editing by Meredith