Last week when the expressions “one-term” Government and “junk bonds” became the talk of the tongue, a fierce debate followed, and we heard that the Standard & Poor’s downgrade of our credit rating to junk bond status was only an opinion.
Even if we ignore the sackcloth and ashes lamentations by Minister Ronald Jones that a downgrade will cause all hell to break loose, a downgrade to junk bond status is a serious thing. It is not just another downgrade. It may be an opinion, but it is an opinion which matters.
But not a word surprised me because “those who fail to learn from the mistakes of their predecessors are destined to repeat them”. Did we not learn anything from the 1987 to 1991 to 1994 period?
All countries, even America, borrow, and countries which borrow money issue bonds to the lenders. Same thing happens when our Government borrows from locals and issues savings bonds. Such loans are used to build infrastructure like an expanded highway, a new Hilton hotel, a new National Insurance building, and to modernize expansions of the airport and Bridgetown Port, just to name a few local examples.
But the hands of the managers of most of the major international lenders have something in common with a local calypsonian. They cannot lend to countries whose bonds are classified as “junk”. As Red Plastic Bag sang, “their hands tied”.
So since these lenders depend on the rating agencies for their opinions as to which country’s bonds are “junk”, such opinions are crucial. A junk bond rating is “dread, then”! Other lenders will impose much higher interest rates and tough conditions on loans to countries whose bonds are “junk” and when those countries are desperate for foreign exchange, they may agree to harsh conditions since money talks. We shall come back to this later too.
So let us remove as much of the politics as we can, and harvest the facts and understand ourselves. In this business, foreign reserves are important to a small open economy. We had none in 1991, and ended up in the hands of the International Monetary Fund (IMF). In this crisis we had such a large cushion left by the outgoing Government (BDS$2.8 billion) that we have not had to go back to them cap in hand.
For that reason the international business sector is crucial because when the economy was partially restructured by Tom Adams, the development of that sector plugged the hole left by the decline of sugar. That is why the then Government moved heaven and earth in 2001 to lead a successful international fight against the Organization for Economic Cooperation and Development, which oppose the sector.
But last Sunday when de facto Deputy Prime Minister Richard Sealy said in response to Lynette Eastmond that the Democratic Labour Party (DLP) had signed more double taxation treaties than the Barbados Labour Party, I told myself that Sealy’s finger was not on the point.
For while The Bahamas, Bermuda and the Caymans were signing tax information exchange agreements (TIEAs), as required by the international authorities, and grabbing our offshore turf, Barbados was stiff-neckedly insisting on double taxation agreements only, although the new qualifying criteria for white listing was for TIEAs.
In the end, to save our skin, we had to start signing TIEAs. So another lesson that we must learn is that we have to do whatever we must to maintain the international business sector. The third is that we do not make the rules.
Now let us go back to the last major crisis we faced of similar proportions. In December 1990 Barbados was almost out of foreign exchange. Mr Erskine Sandiford was Prime Minister and Minister of Finance. Christmas was approaching and a funny thing happened. He went to the market for a loan of $120 million.
He got it but the terms and conditions were harsh. The interest rate was 13.5 per cent and not less than 25 per cent of the loan was held back by the lenders for a period of four years. Mr Sandiford went to the polls one month later and we heard that the economy was batting like Sir Garfield Sobers. That loan matures in 2015. The DLP won the election in January 1991 but before the end of the month, the Government said it was going to the IMF and devaluation was staring us in the face.
The problem then was caused by an 8.9 per cent deficit accompanied by a shortage of foreign exchange, brought about by runaway expenditure! Does it sound vaguely familiar?
We now have a reprise, as it were, of the 1991 to 1993 era so it is not therefore surprising that talk of a one-term Government has resurfaced. Both crises occurred during DLP administrations and after the death of a popular leader! Is it just bad luck or something else? Did we not learn anything from the 1987 to 1991 to 1994 period?
