WHEN THE PHONE RANG the airwaves were saturated with news about two countries unable to pay their debts and the Bajan-New Yorker said she was deeply worried.
“I really don’t understand what’s going on,” said the mother of two children, who has lived in New York for the past quarter of a century.
“My question is: are we going to be next?”
What she was really asking was: will Barbados follow Greece and Puerto Rico? In the case of Greece, the European Union’s debt-ridden member state was technically in default to the International Monetary Fund, meaning it couldn’t meet its obligation to repay some of its debt on time to the Bretton Woods institution.
Next was Puerto Rico, the United States colony in the Caribbean.
It has already put its creditors on notice that the island’s massive debt “is not payable”.
With US$72 billion in debt on its books and a population of 3.6 million to look after, Puerto Rico, once considered a model of economic development for its neighbours, Barbados among them, has become a country that seems well on its way to financial ruin.
“We cannot allow the heavy weight of the debt to bring us to our knees,” said governor Alejandro Garcia Padilla in a televised address last Monday.
Clearly, if Puerto Rico moves aggressively to relieve itself of its debt burden, warned the governor, on a per capita basis, every person there would owe creditors US$40 000 by 2025. Of course, individual Puerto Ricans have to pay that hefty sum out of their own resources.
Although Barbados isn’t in Puerto Rico’s shoes, at least not yet, any Government failure to act could trigger a financial nightmare that’s close to San Juan’s.
Actually, Puerto Rico, whose investment by invitation model, Operation Bootstrap, was copied by Barbados and many of its neighbours in the 1960s, got into its fiscal mess through its own actions and the desire of American investors on the US mainland to make a quick buck and avoid paying taxes to the Internal Revenue Service.
Corporations and individual Americans invested in Puerto Rico’s bonds to save on their taxes because of their high yields which were exempted from federal taxes.
Next was what Mary Williams Walsh described in the New York Times as Puerto Rico’s “complacency about the practice of long-term borrowing to plug holes in the island’s budget”, and the island’s laws that gave bond buyers “ironclad guarantees”.
So, while the money flowed in, Puerto Ricans spent as if there was no tomorrow.
But can Barbados learn anything from Puerto Rico’s troubles? “Yes”, said Charlie Skeete, a Barbadian and a retired senior economic advisor at the Inter-American Development Bank in Washington.
“If you keep telling yourself there are people who are more highly indebted than you, that is not a solution to anything,” said Skeete, a former Barbados ambassador to the US.
“If you keep doing that, one of these days you will end up just like them.”
To avoid the Puerto Rican debt disease, Barbados, he suggested, should consider two options it has before it.
Debt service
The first: cut its fiscal deficit “to a level that would allow it to reduce the need for continued borrowing,” said Skeete.
Next, he recommended “a debt exchange”. Obviously, it doesn’t guarantee “that when you do a debt exchange it would succeed but it is an attempt to reduce the debt service burden on the fiscal account”.
A debt exchange, Skeete explained, was “the technical term that you apply when you try to restructure domestic debt rather than external debt.
“When you try to restructure external debt, you say you are doing a restructuring.
“If you want to reduce the burden of domestic debt, you call it a debt exchange. The bulk of Barbados’ debt is domestic debt.”
Interestingly, several weeks before Owen Arthur, a former prime minister outlined his much heralded fiscal strategy to solve Barbados’ problems, Skeete had outlined the options in a published article in Business Barbados.
However, he stopped short of saying which of the two he preferred.
“I am telling Barbadians they have options. The Leader of the Opposition [Mia Mottley] thinks Barbados has a third option and it’s to refinance the debt.
“She hasn’t said what she means by a refinancing of the debt or how that would differ from a debt exchange.”
Perhaps, what Mottley may have had in mind was a debt consolidation strategy, one in which Barbados would put all of its outstanding debt obligations into a single package and secure an omnibus loan from a different creditor on more favourable terms. That was somewhat similar to a plan proposed some time ago by Minister of Agriculture Dr David Estwick.
It’s not unusual for individual households and corporations to embrace such a strategy to solve financial troubles.
They combine multiple outstanding obligations, for example credit cards debt, car loan and a mortgage from one creditor, pay off the debts so they would have a single obligation, a longer period of time to pay and at a reduced interest rate. It’s not easy for a sovereign government to do that.
“The trick is to find a creditor who will be willing to do that,” said Skeete.
