Last week, the Prime Minister wrote to creditors of the Government, outlining their options under the debt restructuring arrangement (the ‘haircut’) which is to be applied to them this month. Attached to his letter was a 155-page document, which I will refer to as “the Offer”.
The Government insists that only the creditors are to see the Offer. We, who are the victims of this debt and who’re being taxed to death, aren’t allowed to see it.
The total debt is about $3 billion.
But not all of the Government’s creditors will receive a ‘haircut’. For example, multilateral lenders such as the Caribbean Development Bank (CDB) and the International Monetary Fund (IMF) etc., and holders of treasury bills, representing about $900 million worth of debt, are to be paid the full amounts owed to them.
The treasury bill holders are being saved from the ‘haircut’ because many of them are local persons and institutions, and the Government would be mortally afraid of the financial, economic, social and political consequences of ‘haircutting’ them.
But while the protection of local investors is important, we mustn’t lose sight of the possibility that if overseas creditors feel unfairly treated by the process, then our country’s credit and credibility, both regional and international, could suffer.
The St. Kitts-Nevis-Anguilla National Bank (NB) is owed about $1.1 billion. It too will get no ‘haircut’, as it is holding land as security against the Government’s debt to it, and it expects to get back its money, dollar for dollar, through land sales. I’ll get to that later.
I’m not sure of the situation with the Bank of Nevis (BON). The Offer states at page 79 that the “Government is committed to implementing a restructuring (my emphasis) of any loans and overdrafts to domestic banks, and not (my emphasis) backed by land, on terms that generate extensive cash flow relief for the Federal Government whilst ensuring stability in the domestic and regional financial systems. This category of liabilities is expected to represent only a modest percentage of the total loans and overdrafts owed to domestic banks”.
Maybe there’s a connection with the partial guarantee by the Caribbean Development Bank (CDB) and with the Banking Sector Reserve Fund (BSRF) that was set up at the Eastern Caribbean Central Bank (ECCB) with the help of the International Monetary Fund (IMF). So while this sounds like a ‘haircut’, I’d like some more detail. Perhaps somebody in authority will be decent enough to explain. But, perhaps not.
Again, how will overseas creditors react to certain of their local counterparts being singled out for what may appear to be special, softer treatment? And will their respective Governments have anything to say in the matter?
Indeed, how will local creditors (if there are any), who are not to benefit from the special arrangements, feel?
About $520 million worth of bonds and loans that are listed at pages 84 and 85 of the Offer will get a ‘haircut’. As will overdraft debt of about $120 million.
At page 80, the Offer states that “separate arrangements have been, or will be, entered into between the Federal Government and certain of its statutory authorities/corporations and between the Federal Government and the NIA and its statutory authorities/ corporations, requiring certain payments to be made to (my emphasis) the Federal Government in respect of its payments under the New Bonds”.
This could have interesting implications, and for a number of reasons, not the least of which would be the demand created for the flow of money from statutory corporations to the Government, and from Charlestown to Basseterre.
And while we’re on statutory corporations, etc., it’s important that the people of this country get the full details as to the breakdown of each corporation’s share of the debt.
The Government will try to get forgiveness for some of what it refers to as its smaller debts, such as that with the Paris Club. Meanwhile, lenders like Taiwan, Venezuela and Kuwait, which provide low interest loans will, I’m pretty sure, agree to take a ‘haircut’. The Government will deal with them separately and bilaterally. In fact, it seems that Taiwan has already agreed, and details are being worked out.
Now here are the ‘haircut’ options on offer from the Government. Creditors will choose which they prefer.
Option 1. Bonds maturing in 2032 (20-year bonds) discounted by 50% of face value, with interest at 6% for the first four years, and at 3% from March, 2016 onwards. Payment to bondholders will begin immediately and will be effected on a monthly mortgage-style basis; and
Option 2. Non-discounted (par) bonds, maturing in 2047 (45-year bonds) at an interest rate of 1.5%, with a grace period of 15 years on principal payments, after which both principal and interest are paid to the bondholder on a monthly, mortgage-style basis.
However, if by 14th March 2014, the IMF hasn’t issued a press release indicating its approval of the Government’s performance under the Standby Arrangement (SBA), then the originally discounted bonds will be automatically converted into Option 2 bonds but their face value will be reduced by an additional 40% - that’s a second ‘haircut’.
Let’s do the numbers. The Government owes you $1 million today. You choose Option 1, so your $1 million is reduced in a flash to $500,000.00. Of course, your interest rate falls also, from, say 10% to 6% (with a possible further reduction to 3% by 2016), and your maturity date is deferred from, say, 2014 to 2032.
In local parlance, ‘dawg eat you dinner’!
And if by 14th March 2014, the IMF is unhappy, then your $500,000.00 bond would become a $200,000.00 bond (so you’d lose an additional $300,000.00 in a heartbeat), your interest rate will fall from 6% to 1½ %, and your maturity date would be shifted from 2032 to 2057 (or it could be 2055, I’m not sure).
That’s an 80% ‘haircut’, and that’s on face value only. It could be closer to 100%, or even more, because after you factor in the reduced interest, the long-extended maturity date, the loss of access to your money (with the concomitant loss of investment opportunity), and the obligations into which you might have entered using your $1 million as back up, then ‘dawg eat you dinner and you’! You could end up penniless and facing law suits.
Of course, you may wish to cash out and sell your bond, but that isn’t likely to happen at a price anywhere near $500,000.00 between now and March 2014, and if the second ‘haircut’ does materialize, at a price anywhere near $200,000.00 after March,2014. So it’s plenty blows for you any way you look at it!
Now to the Social Security Board (SSB). At page 79, the Offer states that “the debts owed by the Federal Government to other public sector entities, including the Social Security Board, also fall within the scope of the general debt restructuring (my emphasis). The Federal Government expects to issue these creditors a long-dated par bond in exchange for existing unsecured claims. The treatment of modest amounts of secured claims held by intra-Government debt is still being studied”.
Can the Government justify issuing to the SSB, for example, a par bond which is substantially different from that in Option 2? How much of the Government’s $320 million debt to SSB is secured, so that we might know how much of the SSB investment in Government debt will be subject to a ‘haircut’? And could an SSB ‘haircut’ have a knock-on effect on NB?
Finally, NB. The $1.1 billion debt owed to it by the Government is secured by some 4,700 acres of land, sweeping, I’m told, from the Cayon area right over to Saddlers.
This land, or at least some of it, is to be sold and the proceeds of sale used to pay down the Government’s debt to NB.
The two parties “will shortly establish a co-owned, professionally managed special purpose vehicle” to sell the Government’s lands which NB is holding as security.
A term sheet from NB has been approved and finalization of the agreement between the two parties is to be effected by the end of this month. And the execution of this transaction “will automatically extinguish all of the National Bank’s claims on the Federal Government and its public sector” (page 79).
Now this land-for-debt-swap story is a deep wound to the people of this nation. Patrimony stands on two things: the vote and the land. And both have been desecrated.
And the most agonizing and tragic part of it is that whereas the vote and the land came to the people through the agitation and leadership of the Labour stalwarts and true patriots of yesteryear, both have now been desecrated under the leadership of a so-called Labour Government.
This is historically the most egregious violation and betrayal of every fundamental and sacred philosophical and governance principle upon which the Labour Movement in this country was built.
What a disaster. No true patriot can accept that.
How much land is to be sold? Who will buy the land? Will the SIDF buy $200-$300 million worth, to get the ball rolling? How will this land sales deal affect the ability of Government, present and future, to properly develop the country, and foster economic and social growth, national pride, and stability?
Will the land sales be effected under the Economic Citizenship Program, to add to the many that already exist? If so, how would that affect other real estate developments on the island that are already in that Program? And how many will be enough?
Further, suppose the sales do not generate the expected or hoped for revenue. The record thus far in our country shows that land developments take a long time to sell off. What would happen if NB is saddled with a load of land that it isn’t able to turn into cash? What impact, if any, would this have on NB’s value? Or on NB’s operations? Or on its status under the Banking Act?
Suppose, at the stroke of a pen, the Government’s debt-to-GDP ratio falls by 50 or more percentage points, but NB finds itself in a precarious position. Suppose the profligacy continues, and after clearing the debt, the Government starts running up debt again with NB. Will NB continue to keep the Government’s payroll obligations going? Can better results flow from the same old bad habits?
People, wake up.