Bernanke warns local authorities on debt risk

Friday, 4 March 2011 02:29 - - {{hitsCtrl.values.hits}}

NEW YORK(AFP) - US states and local governments could soon see some short-term relief from their debt woes, but must still move swiftly to put balance their budgets, Federal Reserve Chairman Ben Bernanke said Wednesday.

Bernanke said stronger economic growth could improve tattered state balance sheets by raising tax revenues and cutting hardship spending but warned that deficits are still dangerously high.

Despite tough budget-trimming measures, Bernanke said “state and local fiscal repair is far from complete,” as he warned there will be more tough choices and “daunting” challenges ahead.

In recent months politicians and economists have worried that some states and local governments, which have seen their budgets cratered by the recession, could face a catastrophic default.

Prominent economists have warned the municipal bond market -- which local authorities use to borrow cash -- could be see defaults worth tens of billions of dollars over the next several years, as municipalities struggle to make payments.

But Bernanke told a civic award ceremony in New York that “if the economy continues to strengthen at about the pace projected by the Federal Reserve and many private forecasters, states and localities may start to get a little breathing space.””Tax collections will rise with income and spending, and the use of Medicaid and other income support programs should ease as the labor market improves.””Fortunately, although these measures of risk in the municipal bond market remain elevated, they have been looking somewhat better recently, presumably reflecting expectations of continuing improvement in the finances of states and localities.”But the scale of the shortfalls are staggering. According to estimates cited by Bernanke, the across the country unfunded pension liabilities could total run to $2-3 trillion.

“State and local finances will remain under pressure for some time,” he warned.