The Central Bank today drew a roadmap towards restructuring the Government’s six-billion-dollar debt, offering to swap the vast majority of loans for new debt instruments, suggesting a haircut to creditors and stretching the length of time over which they will be repaid.
It’s the best the Government can do under the circumstances, the bank suggested. The alternative: the printing of money and the laying off of public servants in the short term, it said.
This is the first step by the Mia Mottley administration towards comprehensive restructuring of debt that is almost twice the size of the entire Barbados economy since signalling its intention within a week after coming to office by freezing sovereign debt repayments.
The move triggered yet another record round of credit downgrades by international rating agencies, tipping Barbados’s sovereign debt firmly into ‘junk’ territory.
Governor Cleviston Haynes said the Central Bank has already written bondholders setting out the terms of exchange, giving them a deadline of 5 p.m. on October 5 to accept or reject the offer.
Lawmakers will convert all debt instruments classified as “affected debt” into a single asset class for the purpose of voting on the comprehensive debt restructuring,
Assuming that Parliament approves the legislation, as long as holders of more than half of the debt respond to the offer, and holders of at least 75 per cent of the debt accept the offer then it goes ahead and everyone will be automatically exchanged into the new instruments, Haynes said.
As at September 11, local individuals and firms held more than $6.246 billion in Government papers.
If the offer was rejected by the majority of creditors, this could throw the island’s overall macro-economic adjustment efforts into a limbo, Haynes warned.
“To the extent that Government is unable to service its existing debt then you end up neither receiving your interest payments or doing anything about getting your amortization payments and you slow the whole process,” said Haynes.
“We have structured the programme in such a way that there will be no further build-up of arrears in the system. That is going to be very important because that is the commitment you are getting from Government,” he said.
It is expected that the new debt instruments will be issued to participating holders by the end of October, he said, adding that creditors can expect to get a haircut on their returns, which the Central Bank Governor termed a “sacrifice”.
“Clearly the rates are lower than they would have been previously but that is part of the overall sacrifice which all bondholders extensively are asked to make as we go forward, because achieving our objective is not going to come without sacrifice. It is going to be sacrifice at all levels . . . so it is a shared sacrifice which everyone across the economy is being asked to make,” said Haynes.
He painted an alternative picture of a Government forced to make deep cuts in social services and engage in massive public sector layoffs if the measure were not taken.
“I think a decision had to be taken as to where could we get the balance such that it enables us to put the fiscal on a sustainable path. That fiscal on a sustainable path means that we have to be able to meet our obligations when they come due going forward and that is what this adjustment is all about,” he added.
Economic Advisor on the Barbados Economic Recovery team, Professor Avinash Persaud, said the country could not afford the refusal of the new bonds.
“If we don’t have 75 per cent [accepting the offer] then we remain in default. So you will have . . . an old bond which the Government has defaulted on,” said Persaud.
Pointing to Government’s inability to access international funding due to its overall debt, now in excess of 170 per cent of Gross Domestic Product, Persaud said the best option was for Government to default.
“The default is the way back to the path of sustainability. I think people see the default as people saying ‘you are finally going to get your act together’ and that therefore is the route to creditability,” he said.
Had this route not been taken, Government would be forced to print money and lay off public sector workers, said Persaud, one of the Government’s chief economic advisors.
“No wonder our reserve was cascading down and if we didn’t do anything our reserves would have hit zero within a matter of a few weeks. So then you wouldn’t have been able to import things very easily. Then you would have had to adjust not over the four years of the [International Monetary] Fund programme, we would have had to adjust the economy in the months,” he said.
“We would have had to send home a lot of people and adjust the economy in three months. That’s not a credible position I think for Barbados. So the default is the platform that puts us back to a sustainable position. I think that bondholders will ultimately view this as the credible path because where they were was just not credible,” said the economist.
Everyone, citizens and creditors alike, can expect to “suffer pain”, Persaud said, adding there was no easy option but to carry out debt restructuring in a manner “as fair as possible”.
“The bondholders will feel pain, they are taking about half the pain. The other half is being taken by taxpayers and people who are working for Government through Government expenditure cuts. All we can do is share that burden,” said Persaud.