Fed’s Dudley Says Puerto Rico Will Regain Access to Bond Market

Updated on
  • Says commonwealth may return to bond market once plan crafted
  • Says island’s long economic slump can be called ‘depression’

New York Federal Reserve President William Dudley said heavily indebted Puerto Rico may be able to return to the bond market once it completes a plan to recover from its financial collapse and advised that any borrowing should be “strictly limited.”

Dudley, speaking in San Juan, said the commonwealth needs some big reforms to reverse a prolonged economic slump that could "easily be called a depression." Puerto Rico’s economy has shrunk in the past 10 years, fueling excessive government borrowing that’s sent the island over a fiscal cliff and pushed it into federal financial oversight.

"If the government comes up with a viable fiscal plan that the legislature can adopt, I think Puerto Rico will regain access to the markets," Dudley said in response to audience questions. "It’s viable plan first, some credibility in executing that plan - that’s the key ingredient here."

Puerto Rico’s government has effectively been locked out of the U.S. capital markets, with the worsening crisis pushing it to default on a growing share of its $70 billion debt. It hasn’t sold general-obligation bonds since March 2014, when it borrowed $3.5 billion to cover bills, wagering it would buy time for the economy to revive.

A federal oversight board has been tasked with pulling Puerto Rico out of its crisis and is working on a financial turnaround plan. While departing Governor Alejandro Garcia Padilla turned down a request to incorporate deeper spending cuts in his initial proposal, the board said it will move forward with plans to certify such a blueprint by February, after his successor, Ricardo Rossello, is sworn in. Rossello has pledged to work with the federal board to implement public policy and restart negotiations with bondholders.

Dudley, who isn’t officially involved with the recovery efforts, said successful fiscal reform requires local officials to "recognize and accept the reality of the changing economic situation, and set spending budgets accordingly."

The U.S. policy maker also suggested having an independent fiscal monitor in place "on an ongoing basis" to deliver objective -- and potentially unpopular -- analysis. The rescue law enacted by President Barack Obama in June empowers the federal board to review financial projections and oversee negotiations aimed at cutting the island’s debt.

Using New York’s fiscal crisis in 1970s as an example, the Fed speaker stressed that economic transitions can take a long time to complete.

"For 10 years, the city could not access the debt markets without support from the state," Dudley said. "In the case of New York City, the transformation was from manufacturing to services, and it took a generation."

Puerto Rico’s economy has shrunk by an estimated 16.5 percent since 2007 and is forecast to contract by 2 percent in the year ending June 30, according to the island’s Planning Board. Garcia Padilla’s administration has opted to default on its debt to avoid shutting off services to the island’s 3.5 million residents, nearly half of whom live in poverty.