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!

Immediate Annuities Remain The Best Bet to Secure A Decent Retirement

The recent (July-August)  AARP Bulletin carried ominous news for Americans near to or planning retirement. According to A. Barry Rand ('Financial Capability', p. 38):

"Half of those working have no sense of how much savings they will need in retirement. According to the Center for Retirement Research at Boston College, almost 44% of working households, ages 36 to 62, are at risk of having insufficient savings for their retirement years. This puts even greater pressure on national retirement systems that already face insolvency challenges."

The last especially comes to mind as President Obama is once again hoist on the Bush Tax cuts petard, challenging the Repubs to allow those tax cuts to expire for the wealthiest, but allowing the "middle class" cuts to remain (e.g. for those earning $250,000 or less a year.)   But as we know, this is not a serious economic proposal but political gamesmanship. It might energize a few of the base, but isn't a long term economic strategy. In fact as I've blogged on before,

 http://brane-space.blogspot.com/2010/12/bushs-revenge-or-how-zombie-tax-cuts.html

ALL the BUSH TAX CUTS need to go!

We need that total allottment of money saved not only to pay for implementation of Mr. Obama's health care reform plan (especially expanding Medicaid, and especially as the SC ruled the mandate is only allowable under the government's tax authority), but to sustain the health of those "national retirement systems", e.g. Social Secuity and Medicare, that the AARP author indicates will be under more pressure on account of inadequate American saving.

Mr. Obama said in a speech Monday:

"Let's not hold the vast majority of Americans and our economy hostage while we debate the merits of another tax cut for the wealthy"

But that is exactly what we are doing! We are doing it by: 1) Playing on the Republican perpetual tax cut wicket,  hence allowing them to control the economic narrative 2) engendering less revenues and higher deficits the next ten years - which will then demand severe cuts to Social Security, Medicare, Medicaid and even basic benefits like food stamps.

This is a false choice. The middle class, in any case, will be held hostage to Simpson-Bowles (the Obama Deficit Commission, or some other mutant commission hatched by Romney) and having major future benefits cut, perhaps by adjustment of the S.S. COLA or raising premiums for Medicare, if not also the age threshold (to 67). Thus, rather than play this absurd political game with the toxic Bushie tax cuts, Obama needs to come clean and ask people what they want:  minor tax cut benefits for a year or two (or likely more) , or preserving their Social Security and Medicare? They cannot have both and politicians, no matter how much they want to game this, ought not let their constituents believe so.

As today's Denver Post editorial put it (p. 17A):

"We have no objection in principle to the wealthy paying more. However, the point is not to punish the wealthy, it's to put the federal budget on a sound footing...that simply can't be done through tax hikes on the wealthy alone."

Which is exactly correct and the numbers don't lie. By GAO reckoning, hitting the wealthy alone (though it may feel good and perceived as politically advantageous) will save $700 billion over ten years. Repealing the tax cuts for everyone will save $3.7 TRILLION.  That is enough to accomplish a lot, and spare middle class retirees from the future deficit-incited axe to the federal budget that Obama doesn't mention as a consequence of his tax-cut decoupling extension politics. (And we already know from the last time this farce played out two years ago, the Reeps won't go for it. So it will be 'all or nothing' and once more a one or two year extension,... possibly leading to a permanent extension of these insane tax cuts if Romney is elected....paid for by gutting all social programs)

People need to wake up to this and stop blinding themselves to how the tax cuts are actually terrible for our economy. Since I've already exposed the false nature of all tax cuts and any "benefits" for our economy (including jobs) , see e.g.

http://brane-space.blogspot.com/2012/06/no-therell-be-no-tax-amageddon-or.html

I want to focus on the financial strategies to adopt if our politicos go down this horrid path once again, risking the future retirement security of millions and threatening to make the nation a permanent hostage to bond traders and rating agencies (Greece anyone?). As I noted earlier, in proposing my retirement solution  (which I seriously hope she adopted) for former bus driver Karen Klein,

http://brane-space.blogspot.com/2012/06/advice-to-karen-klein-take-money-and.html

the answer is immediate fixed annuities. Let us say that (under a worst case scenario) Mitt Romney is elected in November and on taking office one of his first acts - aided and abetted by a total Reep congress - is to make the Bush tax cuts permanent. This will mean adopting a rigorous Ryan-style budget and cutting Social Security (probably by altering its COLA, so seniors can no longer remotely keep up with inflation) and also voucherizing Medicare, which, contrary to Reepo spin, will also affect the costs for current beneficiaries. I estimate the total hit from all these cuts may be as large as $10,000 a year for each retiree. Maybe a third of the added cost will come from the S.S. COLA change, a third from raising the Medicare premiums or age to receive it or both, and a third will come from further Medicare privatization, generating much larger co-pays, and higher costs for certain interventions, from hip replacements to prostatectomies. (As well as putting a ceiling cost on such procedures, say of $5,000 each with the patient to pay the rest.)

This means at least $10,000 more in annual income will be needed on top of what is already received. In years past, of course, people were led into the stock market, but as the recent (May) Kiplinger Retirement Report noted, those days are gone. Before, given a portfolio of "60% in stocks, 40% in bonds you could withdraw 4% of your assets initially and increase that in subsequent years to keep pace with inflation. Such a strategy offered a 90% probability of not outliving your money over a 30-year retirement."

As Kiplinger then noted, that probability was fine so long as the stock market was growing or bonds performed well when stocks took a hit, but it was exposed as useless in the wake of the 2008 market meltdown when ALL asset classes were clobbered. In fact, the equities market has been essentially flat since 2000. Bonds (i.e. bond funds)  have mainly been exposed as fraudulent, often marked AAA by unscrupulous ratings agencies when they were actually at junk level. (BB or below, because of harboring 'toxic waste' like credit default swaps.)

The alternative now proposed, instead of attempting to get rich quick with huge returns via equities or bond investments, is to use immediate fixed annuities.  I already provided a link in the previous cite for my Karen Klein blog but for those who'd like to see or get an instant estimate of different immediate fixed annuities for differing amounts and ages, go to:

http://www.immediateannuities.com/

According to Kiplinger's, for a 65-year old man in Virginia who wants to spend a total of $300,000 on an immediate annuity the payback now is $1,737 a month. This would add up to more than $20,000 of added income per year, or more than enough to cover the increased costs of social benefits arising from the advent of the deficit mongers....if the tax cut mavens can't halt their addiction to the Bush tax cuts.

I encourage readers to play with the immediate annuities link - plugging in different amounts-  and try to determine what they'd need to invest in a single fixed annuity to generate an additonal $10,000 a year of income for life. Another piece of advice given in the Kiplinger Report is worth repeating:

"Consider buying products from several insurance companies to spread your risk if one of the insurance companies goes under."

This strategy then is one of "laddering" to hedge your bets. I also invite readers to try to ladder a set that would also deliver $10k a year for their needs.

Remember, folks, as long as our politicos are playing the odious tax cut game your future benefits WILL be cut - those cuts will have to pay for your temporary piddling tax cuts. Only someone living in Financial Fantasyland will not see this. It is your job to be proactive and seek to protect yourself now, since you obviously won't be able to depend on our tax cut hostage government to do so!