Wednesday, May 26, 2010

Will Barbados Fall to the Sovereign Debt Crisis? (I)

Having just returned from Barbados, it was interesting to see how that island nation has been coping with the economic maelstrom furiously whirling around it, with gusts higher than a metaphorical hurricane’s. On the surface (see photo taken from our seaside hotel) everything looks fine. But, as we know, in a global economy all nations are linked and one might say – “No nation is an island” - even if geographically it is!

First, let’s clear up some issues: the sovereign debt crisis is not the same as the mortgage crisis which nearly brought down the global finance system in 2008. The latter was predicated upon the unwise purchase (mainly by banks but also by some insurers like AIG) of esoteric derivatives called “credit default swaps”. These basically represented bets on packaged mortgage securities called collateralized debt obligations. Normally, such securities would have attained triple A (AAA) bond ratings, but that only applied if the packages contained no sub-prime mortgages. In the case of the 2008 credit-subprime mortgage meltdown, they did contain such and didn’t merited AAA ratings –yet many were given these by rating agencies such as Moody’s, and Standard and Poor’s. Thus, banks were misled into their bad purchases that led to the accumulation of more than $55 trillion in toxic assets. Hence, the need for bank bailouts.

Second,in the case of the sovereign debt crisis, nations – not banks- are on the verge of default and are seeing their national bond ratings plummet because their debts are too high in relation to their gross domestic product (GDP). The most recent victim was Greece, which finally received a $140 billion (U.S.) bailout (in the form of loans mainly through the eurozone and IMF) but at horrific cost. The Greeks now face massive public cuts – with layoffs to their public sector and the slicing of public pensions along with increased retirement ages. Many public projects also stand to be cancelled, wages cut, and taxes raised. No wonder they’re rioting in the streets.

Like Barbados, Greece depends largely on tourism for its revenue and especially foreign exchange. It has few natural resources nor much of a manufacturing base to support it. Despite possessing barely 2% of the eurozone GDP, the Greeks owe everyone else literally: Britain: $15 billion, French banks $75 billion, Irish banks $8.5 billion, and Portuguese banks $9.7 billion.

Here’s the nexus of the problem: the nations that are owed money (as by Greece) also owe money in turn to their partners. Thus, the whole sovereign debt crisis is like one giant set of national dominoes about to collapse. Thus, Britain, which is owed $15 billion by Greece, $24 billion by Portugal, $114 billion by Spain and $188 billion by Ireland, in turn owes its own creditors – nearly $1 trillion.

The U.S. itself is caught up in this vortex, since American banks are currently exposed to nearly $1 trillion in European debt. At the same time, Chinese banks hold nearly $896 billion in U.S. debt, mainly in the form of treasurys. As the American congress soon goes to vote for another $30-40 billion for the war in Afghanistan- it will ultimately be depending on Chinese bankers to continue to support the increasing war debt, if the U.S. obstinately refuses to use "pay-go" rules to fund its military adventures. No wonder the stock market is in gyration! It can see the writing on the wall and it isn't pretty.

Now, back to little Barbados: it currently has debt in relation to GDP far in excess of Greece. While Greece had a debt of roughly 10% of GDP, Barbados is 53% of its GDP. As one Bajan (“Uri”) who follows the financial pages put it: “No wonder our Prime Minister is not doing so well and is in and out of hospital!” That same astute student of Bajan finance predicted a devaluation of the Barbados dollar within the next year – about the time the country has to cut its debt to GDP ratio by half if it wishes to not end up like Greece. He predicted devaluation to the level of the EC (Eastern Caribbean ) dollar which is currently pegged at 75% of the BDS $. The BDS $ in turn is in a ratio of $2 BDS to $1 U.S.

While the Barbados currency has the highest value of all in the Eastern Caribbean it may be unaffordable to sustain. Along with that higher value comes higher prices (of Bajan goods) to trading partners, and a slow accumulation of a balance of payments deficit. This may also be why so many Barbadian stocks (especially in the insurance sector) have been plummeting.

The other side of it is that the island is definitely living beyond its means, like Greece was, despite a very high VAT (value added tax). From what I beheld when I was there, the very largest foreign exchange outflow comes by way of the tens of thousands of vehicles using gasoline. I would make a wager, probably not too far off in terms of the typical Fermi problem (for which one knows generalities but few specifics, but still can solve it closely) that if Barbados eliminated half its automobiles overnight it would reduce its debt to GDP by at least 30% and probably more. That is how much it's losing by paying the petroleum nations (e.g. Trinidad, Venezuela) for the privilege to drive, as well as hold supercilious events that waste petrol –like “car rallies”.

Even cutting the “motorcars” in half would only reduce the vehicle density on the roads to about what it was when I left in January, 1992. As it is, I estimate with the rate of increase in vehicles there’ll be total gridlock on the island’s roads within four years, maybe less. The number of vehicles in Barbados simply cannot be supported by its near finite roads, which have perhaps only increased some 12% in miles around the island, while vehicles have doubled since 1992. As a result, just to get from Worthing (about five miles from Bridgetown) into town now takes the better part of an hour on a weekday morning, compared to 25 minutes in 1992. (Added to this problem is that to get from point A to B in Barbados often means taking one particular highway, e.g. Highway 7 along the South coast, and there are NO other options).

The other nasty part of the debt equation is the need to import foodstuffs from other islands or nations (like the U.S., Canada, New Zealand, Australia) thereby losing foreign exchange to them. Barbados simply can’t produce enough chickens, or pork, to meet demand, far less vegetables and fruit. Not helping this situation is praedial larceny, by which crop thieves come into fields in the dead of night and steal whole crops just before they’re ready to harvest. This has been a blight on the island since 1990 or earlier, but no Bajan government seems to want to impose the rigid laws needed to stop it – given what’s at stake. I have often proposed allowing farmers to build 10’ high electrified fences to protect crops- but no one seriously wishes to see this implemented. Despite the fact that if all foreign food imports were suddenly cut off most of the population (now 288,000 according to The CIA World Fact Book:2009) would starve.

Something needs to be done, and soon.

In Part II: The Tourism Sector and How it May Save the Day.


Dreamstarworld said...

How did you arrive at Greece's Debt @10%?

Copernicus said...

All the statistics cited in the blog were from an article appearing in The Barbados Sunday Advocate News from May 23rd. They were included in an article written by a former Governor of the Central Bank of Barbados, Courtney Blackman.