Barbados has had a truly historic fortnight – its first 30-0 political win, its first female Prime Minister and what has seemed to go unnoticed in all the euphoria is its first-ever default on a debt payment.
This presents the lowest point of the fiscal position of this country. No matter what has happened, no matter how many downgrades we have endured, they can all be recovered from, there is no turning back now. We have never sunk so low as a sovereign state that we have had to go this route and the painful part is that it is both unnecessary and unilateral.
There was no immediate and compelling danger that would support the need for this brash and ill-advised act by this administration. For all of Barbados and anyone who can read, the Central Bank’s reports inform the decision for the new Government to have discussions with the IMF and I have said as much with respect to the need for fiscal space. However, going to the IMF on the back of a self-inflicted and unilateral declaration of the suspension of payments on external credit will make the negotiation of any terms that might protect workers in the public service, or the extension or even maintenance of our generous social service programs extremely challenging.
I say ‘unilateral’ as most external creditors were informed of the decision only when the nation found out in the press. They now have no choice but to seek legal advice on how to proceed with a client who has moved from high-risk to the recovery team for evaluation. Additionally, the foreign reserves now sit at around seven weeks of cover, which is adequate to service the external debt requirements. So this makes the decision even more mind-boggling. Now understand this, of the $13.783 billion Barbados dollars in debt the country is saddled with, only $2.706 billion is external. Consequently, you can see why taking this action is again so mystifying. If this is the kind of advice the new leader is being afforded, we are in for one hell of a ride.
This jump off the cliff is particularly egregious in part as they were other options open to the Government to mitigate the situation that would have been outlined in the previous administration’s foreign reserves plan, those actions being:
– Sale of the BNTCL – $200 million
– Sale of the Hilton – $200 million
– Investment in the Hyatt (investor to sell forex to Central Bank – $200 million)
With the warning that a failure to complete these transactions in a timely manner would lead to the exact kind of draconian and unwarranted action we now see being manifested.
No matter what the public thinks of those options, they were the very best hope for the safe navigation of the Barbados economy past this point. That option being no longer available with this declaration of a suspension of payments, Barbados is floating without a working engine or an anchor in uncharted fiscal waters.
In December 2001, Argentina defaulted on $81.8 billion of sovereign debt, after months of turmoil in the country’s banking system. That led to the abandonment of its exchange-rate regime and a sharp devaluation of the peso. Argentina’s GDP plummeted by 10.9 per cent that year. It has been locked out of international capital markets ever since. One can only pray that this fate will not befall our country.
With respect to the restructuring of sovereign debt, perhaps some ‘advisor’ has suggested to the new leader that the cessation of payments is the best way to force creditors to negotiate. The IMF leadership has stated its support for debt restructuring through provisions authorizing a trustee to negotiate with the debtor on behalf of bondholders, but without authorizing the trustee to legally bind them to any agreement. This, they suggest in a 1999 paper, could contribute to an orderly and speedy restructuring process. The IMF has gone further to posit that creditors’ committees could have a role to play in effectively resolving financial crises. While the creation of a single standing committee was generally not considered practical, consideration could be given to ad hoc arrangements in appropriate cases. These recent statements by the IMF suggest that the proposals of a framework for orderly workouts of sovereign debt have essentially been accepted. All that remains is implementation. This might be where the Government appears buoyed to take this action.
The writer maintains that this is unfortunately not the case. Market participants – the lenders – still vigorously oppose any official action along these lines. Their opposition is even stronger when it comes to official sanction of payments standstills and IMF lending into arrears, other measures that might be used as part of an orderly workout procedure. More broadly, market participants appear to reject any rule-based procedures and any effective action by the official community to bring about collective action clauses and creditors’ committees.
The banks and securities houses, as represented by the Institute of International Finance, continue to argue against measures that they interpret as making it easier for debtors to default, as well as any official intervention into creditor-debtor relationships – except ‘relatively large but temporary official support.’
Barbados’ credit rating is now a paltry Caa3 which, for a sovereign nation, is high risk and way below investment grade. With a further downgrade to C or with a judicial restructuring package, it may take us even longer to recover any investment parity. The writer would caution the Government to tread carefully in its quest to resolve these complex matters in a manner that appears to the casual observer as an attempt to build the parachute while falling from the plane.
Barbados has a chronic macroeconomic problem that must be addressed in order to sensibly tackle the systemic issues that plague our country. The reality and enormity of that task seem lost on the incoming Government.
Essentially, for the last 30 years, the country has been consistently spending more than it earns. The debt we carry today of $13.6 billion representing 1.4 times our total revenue, is the sum of the deficit we have been carrying for 30 years to maintain the social platforms that make us unique in the region. Successive governments have thought it political suicide to attempt to roll back these expenses, thus the reason we are here today, but we are at the stage now where we, as a country, have no choice.
We have now exhausted our borrowing by successive downgrades, with a credit rating that is endured by few countries in the world. To add injury to insult, our leaders have now made a unilateral declaration of debt default, further compounded by a debt restructuring discussion on external debt which the rating agencies see as yet another automatic default and further compounded in that weakened state, by direct discussions with the IMF on the back of the most generous and expansionary manifesto I have seen in my lifetime. The challenge is that all the initiatives are long to medium-term, while the challenges we face are immediate.
George Connolly is CEO of Business Technology Solutions Firm and a former candidate of the Democratic Labour Party.