Saturday, February 1, 2014

Barbados' Bond Position worsens...What's Next?

One year ago (Feb. 18 post, 'Is Barbados Soon to go the way of Greece') I noted that Barbados bonds were downgraded to junk by Moody's six odd months after Standard and Poor's did the same. I added that these events were disturbing in the extreme, given the island nation had been on a downward trend since I last visited in 2010.

The downgrade lowered the country’s foreign and local currency bond ratings to Ba1 from Baa3. (note: a junk bond, is defined as one that is “below investment grade” due to a heightened risk of default, is any bond with a rating of Ba1/BB+ or lower, according to the system used by Moody’s.) Moody’s  accompanying statement held that Barbados’ outlook remained negative, and cited two factors in the downgrade: Barbados’ “continuing lackluster economic performance,” and “ongoing deterioration in the government’s debt metrics.”

Adding to the concerns, was the fact that Barbados’ economy grew by 0.6 percent in 2011 and 0.2 percent through September of 2012, well below expectations. Meanwhile, The United Nations Economic Commission for Latin America  projected  the country’s GDP to improve in 2013 with a rate of 1 percent . Much of this obviously can be traced to the U.S. recession.

SO what has transpired in the interim? Barely three months ago (Nov. 5) I cited a report in the Barbados NATION (THREE DEVALUATION OPTIONS)  that reported on three options (internal, external and fiscal) for devaluation presented by the Inter-American Development Bank (IDB). The two with the most heft were "internal" and fiscal"- meaning across the board cuts in civil servants' pay (or numbers) or actual currency devaluation.

Earlier last month we learned for the first time of hundreds having been laid off in assorted banks, among whom was my niece Trudi. This followed an earlier government announcement on Friday 13 December by the government of Barbados that it will lay-off over 3,000 public servants in January as a first step in cutting back government expenditure and reducing national demand for goods and services. The announcement rattled other Caribbean Community (CARICOM) members. Since then the Bim government has played it coy and mustered a waiting game, though all eyes remain fixed on further actions. Make no mistake that such a cut - representing more than eight percent of civil service manpower - would be catastrophic from many perspectives.

But it is clear, from an even more recent report out of the Barbados NATION  by Tony Best (Jan. 28) that something will have to be done, and if it isn't rendering civil servants redundant it likely will have to be currency devaluation. Both wifey and I dread this last step because it would mean a severe cut in our retirement income, depending on the magnitude of devaluation.  For example, a 100% devaluation would cut our income nearly one third. (100% devaluation would mean $1 BDS would be equal to $4 U.S. instead of $2 U.S. as is currently the case)

In the latest report (ibid.)  it appears the lowering of Barbados' bond quality in 2013 led the island's cognoscenti to dismiss the signs and portents  - basically resulting in ignoring  Wall Street’s call to action. Since then, Barbados’ bonds have declined to a current BB rating with a negative outlook .  This was described by Richard Francis, S&P’s lead analyst on Barbados, as three notches below investment grade, the lowest it has been in almost two decades. What’s worrisome is his warning that the country stands a one-in-three chance of seeing that rating downgraded again.

If it is, it could well be 'curtains' for those of us dreading massive layoffs in Bim (which will lower its life quality drastically, as well as probably increase crime rates) or currency devaluation which could have many of the same effects.  To underscore this Francis added that while Barbados’ credit rating “isn’t among the lowest of the low”  any further decline would make a bad situation worse and eventually hit Barbados in the pocketbook.

Best emphasized that "the reality should be clear" and added ominously:

"Chris Sinckler, Minister of Finance, went to the financial markets last year to borrow money to prop up declining foreign reserves but couldn’t get an acceptable offer and had to withdraw the bonds largely because of the credit rating.

Obviously, Wall Street’s message had reached potential bond investors and it was that the risk of Barbados’ defaulting on its bonds had increased and to get the money it needed, the island had to pay a “premium”. It’s that straightforward. There is a nexus between the rating, an indication of risk, and the interest rate a country pays".

Best went on to report that eventually Barbados obtained a Credit Suisse loan but the terms were horrendous. According to Aaron Freedman, a Moody's analyst, the "terms are of concern" - which is really an understatement.

How bad? The Moody's analyst cited "LIBOR plus 700 (basis points" - or essentially yields implying Bim's gov't is trading in the "secondary market".  LIBOR denotes the interbank interest rate - what banks allow each other- and 700 basis points is 7 percent on top of that.  The Moody's analyst was further quoted as saying:

“Obviously there is a significant premium risk that the Government is paying. That has direct fiscal implications. If your interest expense rises, it makes it that much more difficult to achieve fiscal consolidation. Interest expense already consumes a significant portion of the Budget. We were expecting it would be close to 30 per cent of Government revenues, which is one of the highest levels we have seen anywhere.”

Best observed that the analyst's point was underscored by a headline in a Bloomberg News story: Barbados Bonds At Record Yields As IMF [International Monetary Fund] Urges Restraint:

Yields on Barbados’ 2021 dollar bonds were at a record 9.58 per cent at 12:16 p.m. New York Time [December 20[ and were up 33 basis points, or 0.03 percentage point, this week. The 2022 bonds trade at 9.61 per cent after rising to a record 9.64 per cent on December 18.”
Best adds that the decline in foreign reserves is the major reason for the record-high interest rates Barbados is paying on its bonds. Such a decline, which also occurred before the IMF intervention in 1991 (after Barbados attempted to emulate the Reagan tax cuts in 1986) essentially was accelerated when people with monetary interests in Bim (but living in the U.S.) began pulling money out - or existing residents tried to get money into U.S. banks to escape possible devaluation. But even before this, foreign reserves were dropping because of the island's continued massive importation, e.g. of food stuffs, as well as automobiles.

 I pointed such problems out in a blog back in May, 2010 ('Will Barbados Fall to the Sovereign Debt Crisis', Pts. 1 and 2). I wrote:

 "In terms of food, nearly all has to be imported and fuel costs add to the import costs. Bajans do grow a lot of their own, e.g. chickens for example, but it can't meet the island's demands. Autos, meanwhile,  clog the island's narrow highways and biways. Each also must be imported, as does petrol, and the costs of both are eating up precious capital"

What must be done? Best's words are stark and unforgiving but probably spot-on:

"Barbados has to take tougher action in order to stabilize its finances and boost its credibility. So, despite the statements by unions about layoffs and the delay in accelerating the layoff by two weeks, Government must go ahead with its plans."

Carl Rose, a managing director of Oppenheimer in Atlanta, quoted in Tony Best's piece, observed:
"The market's signal is clear: Barbados must implement its adjustment report quickly and forcefully.”

Tony's parting words?

"The Barbados Workers’ Union and National Union of Public Workers may shout and scream but more painful cuts, even beyond the initial 3 000 tranche of layoffs, are needed to protect the currency, cut the deficit and reduce the debt."

Let's hope the island's leaders, and its people, do the right thing to protect the country ....and soon!

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