The Debt Holder Bill is currently being debated in Parliament. It is an attempt to make the Government’s plan to restructure some of our national debts legal. What is this restructuring all about?
The Government normally spends more money than it receives in taxes. One method of making up the short-fall is to invite persons and institutions to lend the Government money for a fixed period. In exchange for this loan, the Government promised to pay investors a fixed amount of interest every year.
To give investors sufficient confidence that they would get their money back with interest, the Government guaranteed that the loan and interest payments would be paid from the same fund that pays Parliamentarians, namely, the Consolidated Fund. Should that fund become insolvent, then Government assets were promised to secure the loan.
With these ultra-low-risk terms, individuals and institutions were encouraged to enter into binding contracts to lend the Government money, and the Government agreed to repay the loans, with interest, under the specified terms.
The Government now wants to change the terms of repayment. That is not unusual since borrowers typically want to renegotiate repayment terms if they encounter adverse economic circumstances. However, rather than negotiate with the other party to the contract, the Government is planning to pass a law, to allow a vote, to make the repayment terms less favourable to investors.
The Bill notes that if at least 50 per cent of eligible voters participate in the vote, and 75 per cent of the participants agree to the new terms, then the vote will be binding on all loan contracts – both for those who agree to less favourable terms and for those who do not.
Our Parliamentarians are using a very crude method of getting their way. There are far more elegant solutions that they could have considered. However, they seem too terrified of their economic advisors to consider any other solution. Let me identify three principal concerns with this approach.
First, to justify their planned actions, the Government declared that it did not have the ability to repay the loan as agreed. This declaration of insolvency causes investors to lose confidence in the Government.
Tragically, the declaration was unnecessary. The Consolidated Fund reportedly has severe leaks, including the mismanagement of public services, excessive wastage and gross corruption. Why not patch those leaks before declaring an inability to pay?
Further, since the Government claims that it cannot pay investors from the Consolidated Fund, then why did our Members of Parliament vote to increase public worker’s salaries (including their own) by five per cent, if they knew that the Consolidated Fund was insolvent? Does this mean that our Parliamentarians were not paid last month? If they were, then clearly the Fund is not insolvent, and we were misled.
Secondly, the Bill appears to give power to the majority of voters. However, a voter is defined in terms of the size of the investment. So, it is not the number of voters, but the size of the voter. Therefore, one large voter can have more weight than 1,000 individual voters. Let me explain.
Approximately 85 per cent of the National Insurance Investment Fund comprises approximately $3.5 billion lent to the Government in Treasury Bills, Treasury Notes and Debentures. It is unlikely that 1,000 pensioners’ individual investments are anywhere close to this amount.
The votes of the NIS, banks and insurance companies exceed the 75 per cent limit for the measure to pass. If the NIS is excluded from the vote, votes of the banks and insurance companies still exceed the 75 per cent limit. Since these entities are all-aboard, it makes the vote farcical – but it is good public relations.
Thirdly, and most importantly, the idea of crudely legalizing changes to a contract between two parties, is of concern. If the Government wants to change the terms of an existing contract, then they should simply renegotiate, which is a normal business action – not dictatorially pass a law to unilaterally make it so.
The Constitution of Barbados recognizes contracts. In my opinion, the Government’s intended action is unlikely to survive a constitutional challenge.
Grenville Phillips II is a Chartered Structural Engineer and the founder of Solutions Barbados. He can be reached at [email protected]