The importance of a haircut on Barbados debt

I am not familiar with the details of the discussions going on with the foreign creditors but I have a few thoughts based on working for many years at international banks (CHASE, Bank of America and RBC) as well as the World Bank Group in different countries including Brazil.

I view it in simple terms:

1. Barbados over-borrowed and that means that someone over-lent.

2. Barbados simply does not have the capacity to repay and the Barbados debt is a bad debt.

3. When a bank has bad debt it has to work it out but a loss is to be expected—the only question is how much?

4. My gut feeling on a haircut on the foreign debt is about 50 per cent. Someone could argue 45 per cent and someone else could say 55 per cent.

5. A creditor is a creditor and I do not think that a foreign creditor should expect or get any special deal. Obviously, if a creditor has good security they can execute and recover whatever they can. The Barbados Government must stand firm in its negotiations with the foreign creditors. I distinctly remember that a former President of Citibank once said that a country cannot go bankrupt—for me that is nonsense.

6. I totally disagree that paying a foreign creditor will improve the Barbados reputation and allow it to return to the international market. Greece is an example of a country with a terrible reputation that was able to return to the bond market. Earlier this year, Greece drew orders of over 10 billion euros (US$11.3 billion) for a 2.5 billion-euro sale of five-year bonds in January 2019, after exiting it’s third and final bailout in August 2018. This return to the bond market followed a 75 per cent haircut for bond holders on $77 billion of Greek debt in 2012!

Foreign creditors will only return to lend to Barbados, when Barbados deserves it. In other words Barbados must take the necessary steps over time to improve its finances. A good credit rating takes time and it must be earned.

A foreign creditor who takes a haircut or “shave” on Barbados debt will probably not wish to be exposed again. That is to be expected and that is okay because once Barbados  demonstrates that it is a good risk, they will find a willing lender. Moreover, there  are always some investors that prefer a higher rate of return and they know (or ought to know) that it also carries a higher risk.

Debt restructuring is often necessary but when you have the level of debt that Barbados has, restructuring can only do so much—it needs to be re-sized as well. If we only restructure, will new loans from the multilateral institutions not increase our debt level? Without hair cuts, how did our debt to GDP fall? The answer is that perhaps some domestic debt held with the Central Bank of Barbados and the National Insurance Scheme may have been cancelled. Successful debt restructuring (extending the tenor and reducing the interest rate) is also based on projections and projections are only as good as the assumptions. The problem with assumptions is that a “reasonable or good” assumption today can be proven to be a bad one in six months.

7. The key for Barbados now, is that it must secure enough credit from IMF, IDB, CDB and a country so that it will not go back to the international markets for several years. In my books, debt is debt and I am not interested only in longer maturities and lower interest rates—the debt level must be reduced now and hence the need for a substantial haircut. If we do not reduce the debt level significantly, all we are probably doing is postponing the problem. The Government also needs some wriggle room in the event of unforeseen circumstances. The experience of Grenada is worth noting.

8. The Grenada experience:

After hurricane Ivan in 2004, Grenada restructured its debt but failed to push for a haircut. They did not create sufficient wiggle room and made assumptions on economic growth and fiscal space based on pre-2007 growth rates. However, the economy stalled following the 2008/2009 financial  crisis. National assets had to be sold to meet the monthly wage bill for public sector workers and unemployment shot up to 40 per cent.The outgoing government defaulted on debt in 2013 and the incoming government was forced to devise a “home grown program”, supported by trade unions, churches, civil society, the World Bank and the IMF. This included wage freezes, structural reforms, new fiscal discipline legislation and, importantly, a 50 per cent haircut on outstanding debts.

9. There are creative ways that a country can get credit in difficult times. On a small scale, when the international banks stopped lending to Brazil in the 80s (after throwing money at Brazil in the 70s) CHASE in Brazil gave me the task of getting trade finance lines from banks for its subsidiary in Brazil. It was not easy because all banks had gotten off the bandwagon of lending to Brazil, including CHASE! Nevertheless, I was able to get about US$150 million for trade finance. I visited numerous banks in the US to arrange credit lines (most of these banks no longer exist). Many said no but some said yes.

In the final analysis, “credit is man’s confidence in man!”

John Beale is a former Barbados Ambassador to the US, Mexico and the OAS appointed by the DLP and he was the Barbados Honorary Consul in Brazil appointed by the BLP.