Investors Hope For 'Correction' Cure - But It Won't Prevent the Ultimate Debt Crash

The Wall Street Journal yesterday featured a front page article, 'Stock Retreat Has Its Fans', which piqued the interest of many.  Quoting from the first two paragraphs:

"Many investors and analysts fear a postelection rally that has driven the S&P 500 up roughly 10 percent has cleaved share prices from the underlying fundamentals that tend to drive gains over time, such as interest rates and corporate earnings.

What's due now, some investors say, is a correction: a 10 % pullback from the indexes' March 1 high. They contend such a retreat would tamp down speculation, defray pockets of froth in popular investments and provide buying opportunities for those still on the sidelines."

The article goes on to state that such declines serve an important function in a market economy basically letting some of the excess 'gas' out of the balloon - which might otherwise blow up, i.e. resulting in a major crash. In this regard, the stock market is already well into bubble territory. Thus, long periods without the healthy corrections lead to market pathology and "unruly trading" - inflating the bubble further until it bursts.

Some may console themselves that a 10 percent correction or maybe even 12 percent, will ease their insecurities but alas, the crash is still on its way. What I would call a "sovereign debt crash" because it will ultimately be the recognition that most national debts can't be repaid that will be the tipping point to one of the largest crashes on record.

First, let's understand the nature of a sovereign debt crisis.,  Sovereign debt 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.

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).  In my March 22 post, I already noted Barbados as being deep in the maw of a sovereign debt crisis.  This followed yet another Moody's bond downgrade, down to Caaa3+, and Barbados now being on the verge of currency devaluation.

The Moody's report on the reasons for the downgrade included:

The government debt burden reached 111% of GDP at end-2016, and the authorities have accumulated a large stock of arrears to the private sector and the National Insurance Scheme,, estimated at a further 11% of GDP at end-FY2015/16. 

The National Insurance scheme is similar to Social Security in the U.S. and what the Moody's report indicates is that this program is over extended with the gov't already in arrears in what it owes (fro borrowing from the NIS) by 11 percent of GDP. In other words, the Barbados government is printing millions of dollars a month to try to keep seniors receiving their pensions.

Some may believe Barbados is an exception, but it isn't. Around the world governments are buried in debt - sovereign debt. It is this debt bomb - building up - that will ultimately roil the markets, along with serious missteps by the Trumpites in handling any future financial crises.  

But back to the sovereign debt crisis, not only is the U.S. in up to its eyeballs, with the Trumpites set to blow the debt wide open, i.e.


That is, the federal debt as a percentage of GDP would explode through the roof - exceeding the size of the entire U.S. economy within ten years. of Trump and the GOP get their tax policy plans rammed through.

Meanwhile, Europe is printing euros like there's no tomorrow, and debt - especially in nations like Spain, Portugal and Greece, piling up to unprecedented levels.  Then there is the Bank of Japan which has printed over 13.3  trillion yen   The Fed in the U.S. has done its own form of printing money by way of "quantitative easing", purchasing over $4 trillion in the bond market.

All of these signals in tandem show the instability of the global debt crisis and no one who looks into these can remain complacent. Barbados, of course, is near and dear to my heart  - so I pay special attention to what goes on there, like I do here in the U.S. But other nations' debt issues can't be overlooked because they also impact our own financial-economic conditions. As their own sovereign debt crises have manifested the oncoming 'train wreck'  is difficult to avoid. Expect to see default after default.

What's my main worry looking at Barbados and other nations? Well, that none of their debts will ever be repaid. Those debts, including unfunded liabilities into the future (e.g. pensions to be paid) are simply too huge for repayment even in instalment. The credit agencies Standard and Poor's and Moody''s already seem to recognize the writing is on the wall in the case of Barbados, which is why the loan conditions now are so draconian there's no way the debt will be covered.

It is no 'biggie' then to foresee that the debt collapse now drowning Barbados will very soon hit Europe, then spread to Japan - and the U.S. by the end of the year.   That end point will be accompanied by falling oil prices, failure to raise the debt ceiling after a brutal partisan showdown (and Trump -GOP bravado), and then cratering bond prices.

Obviously, borrowing more money for any sovereign debt nation isn't the answer. It hasn't been for Barbados, and has only pushed it into a debt hole. The same is true for Greece, Spain, Portugal, Japan and others.  Borrowing is especially useless as the loan terms are degraded - less money on offer, accompanied by more demanding loan condition. Ask Barbados' Central Bank.

Yes, a correction will likely help in the immediate future to stabilize stocks, but not in the longer term, and Trump's own actions may precipitate whatever crash is in the works to happen much sooner.

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!
  

Is Barbados Soon To Go the Way of Greece?

Tourists and Bajans flock to a vendor's stall to buy fresh grilled deep sea fish and "fixins" at the Oistins Fish Market. Will they still be able to enjoy this simple pleasure in the near future?


The recent news that Barbados bonds were downgraded to junk by Moody's - this six odd months after Standard and Poor's did the same -was disturbing in the extreme. It elicits the question of where the island nation is headed, and indeed if its future is one of profound austerity like that of Greece.

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.)

Standard and Poor’s lowered Barbados’ rating to junk in July. (The country’s S&P rating is BB+).

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.”

Barbados’ economy grew by 0.6 percent in 2011 and 0.2 percent through September of 2012, well below expectations, according to the New York-based ratings firm. (The United Nations Economic Commission for Latin America recently 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 which hit the islands with the force of a hurricane). The Moody's statement went on:

“Moody’s believes that the country’s growth prospects remain very limited due to its deteriorating competitiveness and declining productivity coupled with heavy dependence on tourism, particularly from the United Kingdom and the United States. Given the prospects for continued low economic growth in those countries, discretionary spending on travel is likely to remain subdued.”

Over the last 10 years, according to Moody’s, Barbados has grown at a compound average annual rate of just 1.2 percent, among the slowest for countries rated by the firm.

The firm also said that Barbados’ offshore business sector, the country’s second-most important industry, “also faces greater competition and is coming under increasing pressure from changes in tax laws in the US, Canada and the UK.” Adding:  Barbados’ negative outlook considered that economic performance is likely to remain weak.".

This ought to be obvious to anyone who knows the island and its employment situation, lack of resources and depending largely on the one trick pony of tourism. Also that although offshore banking had helped with diversification, attacks by minions of the OECD nations (i.e. on any offshore banking as somehow disreputable and 'unlawful')  caused harm to Barbados' economic health.  Few of these attacking nitwits learned or knew that many of us had lived in Bim over decades, and hence had set up and kept banking accounts there- even after we departed. Not to get secretly rich, but to use the $$$ whenever we visited - for beach house or hotel accommodation, car rentals...and just to purchase freaking expensive groceries at the food marts! Anyway, Moody's goes on:

“While the worst appears to be behind Barbados both in terms of fiscal deficits and economic deterioration, Moody’s anticipates that the government’s deficits will remain large for the next few years and its debt levels will continue to rise, albeit at a slowing pace. Even if the country is able to consolidate its finances and stabilize its debt metrics, they are unlikely to improve meaningfully for the foreseeable future given its poor economic prospects.”

The credit rating agency said that Barbados’ government faces “difficult choices” in its stewardship of the economy. Well, uh yes! Choices much like Greece's: to make serious cuts on top of existing high VAT (value added taxes) and send the populace into a furore, or try to keep a slow steady but small growth pace and offend the high and mighty rating kings. (The same lot that awarded AAA ratings to bonds laden with credit default swaps back in 2007-08)

Anyway, we who once lived there and continue to visit also  hope that doesn't mean a currency devaluation or worse! We hope Bim doesn't go the way of Jamaica and Trinidad!(One TT$ is now worth 1/6 of a U.S. $)

Moody's statement ominously goes on:

“In the absence of significant corrective measures, debt metrics will continue to rise, and if the government does take such measures, it risks putting the economy back into recession, On the other hand, many of the proposals to boost economic growth carry the risk of continued deterioration of the government’s financial position, at least in the near term.”

More distressing, in terms of currency issues,  Moody’s announced that it had additionally revised Barbados’ local currency bond and deposit ceilings to Baa1, its long-term foreign currency bond and deposit ceilings to Baa2 and Ba2 respectively, and its short-term foreign currency deposit ceiling to NP.

A Moody's threat perhaps?

“The rating will face further downward pressure unless the government is able to successfully navigate the current situation such that a clearly visible and easily achievable path to stabilizing debt metrics is established within the next 12-18 months, in which case the outlook could be revised to stable. The rating could also be downgraded if pressures on the currency peg mount significantly.”


The Central Bank of Barbados itself added, however, that Barbados' economic strategy "remains unaffected by the downgrade," and continues to focus on conserving foreign-exchange reserves and growing the foreign exchange-earning sectors.

"Thanks to a sufficiently tight fiscal stance, foreign-exchange reserves of BDS$1.4 billion on December 19, 2012, have been maintained at about the same level as at end-December last year."

See e.g. http://www.youtube.com/watch?v=A9g1DOm6By8


Meanwhile the claim that Bajans are “heading back into poverty” (Barbados Sunday Advocate, p. 3, yesterday) , is disconcerting to say the least. This is especially pertaining to the statement (by one political rep, Trevor Prescod) that people are “begging in the street for bare necessities.” One hopes not!!

My personal barometer, meanwhile, remains the status of de-mutualized Barbados insurance shares. Their value has plummeted more than 50% in the past five years and this brings the whole “junk” meme into a whole new immediate realm! To clarify, de-mutualization of an insurance company, in this case the Barbados Mutual Life Assurance Association (after being taken over by Sagicor Financial Company), meant a component of life insurance policy value was transferred into stock shares (in this case of Sagicor). The process itself is termed “de-mutualization” and there is no choice by any insurance holder to accept them or not. (Though a 'policy holder's meeting' usually determines the decision.)

These aren’t like normal stocks because: 1) The total amount of shares distributed doesn’t vary. Thus, there is no ‘buying on the dips’ to increase the number of shares owned nor can one 'buy' more shares in any case. One is issued a fixed allotment based on the value of the original policy. All that happens is your total stock value on paper continually goes down if the share value goes down. 2) The losses are REAL, i.e. as per a (2008) federal claims court ruling, there does exist an original cost basis (not 'zero' as the IRS once claimed) , and if one sells at a value below that cost basis a real capital gains LOSS is realized.

Basically, in the past five years I have watched as the total value of those demutualized shares  has‘melted down’ to appallingly low levels, vaporizing - at least on paper - what might have helped for a rainy day. But perhaps I ought to have seen this coming. Back in 2010, I sounded an alarm on Barbados’ growing debt (see e.g. http://brane-space.blogspot.com/2010/05/will-barbados-fall-to-sovereign-debt.html

Noting that at the time that while Greece had a debt of roughly 10% of GDP, Barbados’ debt was 53% of its GDP. At such a significant debt ratio it has become obvious in hindsight that the country has had to borrow to sustain itself, eventually reaching the point that both S&P and Moody’s downgraded its bond status.

In a followup blog: http://brane-space.blogspot.com/2010/05/will-barbados-fall-to-sovereign-debt_27.html

I warned that Barbados had to strive to keep the quality of its tourism product high,  given the recession had caused potential tourists from the U.S. especially to be much more selective. Barbados wasn’t the only great beach destination in the Caribbean after all! In that blog I pointed out a number of customer ‘breakdowns’ that didn’t help advance Bim’s rep, or its tourist capital. For example, one service worker quarreling when I asked for an ice cold Diet Coke plus a cup of water with ice. Then at a TGIFridays, a waitress sending assorted platters spinning off her hand nearly toppling over the drinks of my guests, after having been asked why – after 35 minutes- our ice cream sundaes had not been delivered.

Beyond that, in the two plus years since, I’ve been distressed to read in online papers of Barbados continued noise problems, as voiced by numerous tourists. They complain of everything from loud music going way past midnight, to dogs endlessly barking. Make no mistake that NO tourist has to travel so far to tolerate such ‘botheration’ when they can find a relatively quiet beach hotel near St. Lucia’s Pitons and at lower rates.

Hence, in some ways it’s been no surprise that Barbados’ economy has grown so meagerly the past two years, given tourism remains the central foreign exchange earner. (Offshore banking also has been, but has suffered somewhat by being tarred by assorted Neoliberal Loons, like former French Premier Sarkozy, imputing nefarious “tax dodging”  at OECD conferences and Banking confabs.)

Will the outlook improve? One can only wait and hope! The island is holding its general elections this year and perhaps the outcome will spur change in the right direction. This although ominous warnings have circulated regarding impending privatization, including of the water authority, pensions etc. Let us hope that's not the case!

When I next visit the island I certainly don't want to behold a Caribbean version of Greece!