As Government’s external debt restructuring hangs in the balance suspense is mounting as to whether the nation will be able to regain access to international capital markets, says President of the Barbados Economic Society (BES) Shane Lowe.
And the country runs the risk of a further delay of an upgrade of its external credit rating, Lowe warned.
Giving an analysis of the current stand-off between Government and external creditors, Lowe told Barbados TODAY it was in the best interest of both sides to reach an agreement.
“Failure of both parties to come to a consensus will keep the Government’s outstanding external debt in default for a longer period and further delay any upgrades to the credit rating on its foreign currency debt. This will delay the Government of Barbados’ ability to regain access to international capital markets should the need arise after funding from the International Monetary Fund (IMF) and other multilateral lending agencies slows down,” said Lowe.
A debt restructuring deal for local holders of government debt was announced three months ago, with officials promising a “similar” deal for external creditors in “the not too-distant future”.
Under the deal, the majority of loans are to be swapped for new debt instruments, with lower interest rates and a longer period over which they will be repaid.
Weeks after the announcement, international rating agency Standard & Poor’s raised the country’s long- and short-term local currency sovereign credit ratings to ‘B-/B’ from ‘SD/SD’ (selective default).
Government’s special advisor on the economy, Professor Avinash Persaud had told Barbados TODAY that “naturally [external creditors] would desire a far more modest adjustment”, adding that they were trying to pressure government into submission.
He added that government’s current adjustment programme had placed it in a position that “we do not need to borrow any more money from the external creditors so we can afford to wait to ensure that Barbados gets the best deal that is fair to all”.
But, growing impatient and seemingly not willing to accept the same deal as local creditors, the external creditors have sent their own proposal for Government to consider, with former central bank governor Dr Delisle Worrell suggesting that the proposal would be mutually-beneficial and would remove any threat of devaluation of the Barbados dollar from re-emerging.
“The proposal offered by the external creditor committee would consolidate five US-dollar bonds into a single medium-term issue that would attract a competitive market interest rate. Government would no longer need to repay US$350 million of maturing debt in 2021 and 2022. Barbados’ sovereign credit rating would immediately improve and government and its agencies would regain access to US-dollar loans,” Dr Worrell explained.
Lowe told Barbados TODAY that Government’s current projections suggested that it did not want to borrow from either domestic or external private sector sources in the medium-term, and so access to capital markets may be less relevant through to 2023.
“Beyond the end of the IMF’s four-year Extended Fund Facility, access to foreign, private sector financing may prove more difficult if current negotiations remain at a deadlock,” Lowe warned.
“In fact, some empirical evidence suggests that countries that take longer to settle with creditors or who remain in default for longer periods of time pay a higher premium on their future debts than countries who settle with creditors much more quickly,” he added.
The Barbados situation also brings back memories of the Argentina debt restructuring of 2001, which resulted in some creditors who opposed that country’s debt restructuring taking the matter to court some years later, demanding to be repaid 100 per cent of their bonds’ face value.
As a result, Argentina did not return to the international borrowing market with sale of sovereign bonds until 2016, about 15 years after it defaulted.
Acknowledging that debt restructuring negotiations are often never straightforward, Lowe said they usually involved several rounds of talks as both sides seek to come to a mutually-beneficial agreement.
While Government is seeking to ensure that it achieves as much cash flow relief as it can in light of two looming debt payments in 2021 and 2022, external creditors, though cognizant of government’s precarious foreign exchange reserves position, seek a resolution which minimizes the losses on their investments, said the economics society leader.
In light of this, he said it was very difficult for him to predict when creditors and the Government will come to an agreement.
But Lowe has called for a speedy and cordial completion to the negotiations.
“It is therefore in the best interest of both parties to come to an agreement on this matter. Continuing to be in default delays future upgrades to the government’s credit rating and limits its access to foreign, private sector capital, while external creditors who hold Barbados’ debt will continue to earn nothing on these instruments and probably receive none of their principal until both parties come to a resolution,” said Lowe.