Since 2010, Antigua and Barbuda, Belize, St Kitts and Nevis, Grenada, the Dominican Republic and Jamaica (twice) have all defaulted on their dollar bonds and sought to restructure their national debt. Barbados has selectively joined this group.
All these countries chose White Oak Advisory LLC as their advisor in their restructuring negotiations and again, like these countries, the Barbados Government has also selected White Oak as its advisory lead. There is nothing in the history of these transactions to suggest White Oak’s intervention has made any difference in these countries’ fortunes or the course of the IMF negotiations. In fact, Jamaica has had what most international officials consider as the most draconian IMF programme ever and most doubted it would have been successful. It is starting to show progress with the IMF and its own debt swap programs, without the White Oak Advisory burden.
Grenada has turned to prayer, with prime minister Keith Mitchell allowing the local clergy to meet with the IMF asking for a write-off of two-thirds of the debt, using the term ‘Jubilee’ in its Christian sense, meaning a one-off forgiveness of sins.
The Barbados Ministry of Finance and the gaggle of consultant economic advisors that accompany it should explain when we should start praying for White Oak to deliver anything.
Despite ‘debt restructuring,’ Jamaica, St Kitts and Nevis and Grenada still have a national debt ratio greater than 1.4 times GDP. This is particularly troubling in the case of St Kitts and Nevis which retained White Oak since 2012. In May of that year, then prime minister Dr Douglas, his finance minister and two representatives from White Oak made a presentation to the Paris Club Creditors asking for their support in transforming the country’s economic and social outlook. At the time, they also boasted of just completing negotiations on two historic deals that would reduce their debt to GDP ratio from 150 per cent to 95 per cent.
The dialogue at the time was all correct. The St Kitts government was making a strong case for debt relief, satisfying creditors that an appropriate macroeconomic course was being followed, reassuring all stakeholders that the approach was based on fairness and openness and inter-creditor equity. I repeat – all the right rhetoric.
However, Dr Timothy Harris, the current prime minister, who did not retain the services of White Oak Advisory credits the 13 per cent reduction since 2015 on home-grown polices and fiscal discipline. Dr Harris made a point of contrasting the IMF Report under White Oak’s Advisory guidance to the period from when he took office. “The IMF stated then (2014), that St Kitts and Nevis is recovering from a four-year economic recession occasioned by the international financial crisis and the need to restore fiscal sustainability and restructure public debt. In contrast, St. Kitts and Nevis attained its strongest growth and fiscal performance in the Eastern Caribbean Community in recent years.”
The question therefore is what value does White Oak LLC really play? I am not what one considers a hyper-sceptic, but I always ask what skill sets these consultants offer over and above locally based advisory firms like PwC, EY, KPMG, Deloitte, etcetera, and why would they attempt to ply their trade in small debt-ridden markets rather than compete in the larger prosperous markets where they live. The comment from White Oak on the slow pace or lack of progress is from one of its partners: “This is not easy.”
I think it’s important to break down what sovereign debt restructuring is as Barbados heads further down the rabbit hole of selective default and ignominy, holding the hand of a boutique UK-based advisory firm that sells its services primarily in the troubled, most often desperate Caribbean islands and that has done little to assist the others it has accompanied down this path before.
Sovereign debt restructuring is an exchange of outstanding government debt, such as bonds or loans, for new products or cash through a legal process. It takes one or both of the following forms:
1. Debt Rescheduling: extending contract payment into the future and possibly lowering the interest rates on those payments.
2. Debt Reduction: reducing the nominal value of the outstanding debt.
This international debt architecture, like every other initiative, has advocates and opponents; and Barbados is part of a growing list of developing countries that are being viewed with suspicion and dread by bondholders. No matter how we spin this, the fact is that no new bondholders will take up Barbados bonds. The existing bondholders will be the ones forced to join the experiment and even if they take a haircut, it will be done with dread and trepidation, hoping that they do not lose more than what they would have accrued.
Those who oppose reform claim that the status quo works and we should not fix what is not broken. They also argue that making restructuring easier makes defaults more frequent and countries would not take the disciplined approach to managing their debt. This then leads to easier and more frequent defaults that undermine the very nature of a bond and with it the role of sovereign debt versus any other.
Given that government debt is primarily 70 per cent locally held, what impact does the White Oak Advisory interjection have on discussions being held with partners that have held your hands over the last 20 years? CIBC which is holding some USD $506 million in government paper is reporting in Canada that it is bracing for the worst but remains optimistic that the pain will not be crippling.
This position will obviously harden CIBC’s credit rules (some may think that would be impossible) and bring even more scrutiny as what was thought as a blue-chip client has selected not to pay and then forced them to participate in a collective bargain to recover the debt. The Caribbean is financed by Canadian commercial banks and we need to understand that, in the scheme of things, we are small, technically complex, disparate clients who believe we should be treated in a special manner. The truth is, we are not special and as proved by the Barclays Bank PLC departure and sale to CIBC, these Canadian banks can leave and create an even greater debt crisis than what exists. Now, we understand that CIBC Caribbean is seeking a buyer. Let’s see how that pans out.
When the IMF is uncertain of the sustainability of sovereign debt levels as is the case in Barbados, the agency advocates debt re-profiling rather than restructuring before the country can become eligible for IMF assistance. Under re-profiling, there would be an extension of maturities on the existing sovereign debt, but with no change to the interest or principal. Essentially, it’s a way of giving sovereigns more time to pay debt. In cases of genuine uncertainty regarding a country’s debt sustainability, re-profiling could help buy much needed time to assess the situation, restore growth and debt sustainability and avoid the high cost of unnecessary bailouts and restructurings.
This is the preferred route of the IMF for Barbados and it is the quoted position of the current Minister of Finance. The question then remains – why does White Oak Advisory need to be involved in re-profiling? Restructuring is their supposed area of expertise.
George Connolly is CEO of Business Technology Solutions Firm and a former candidate of the Democratic Labour Party.