Winston Cox was, until recently, the Caribbean’s executive director at the Inter-American Development Bank in Washington. Once the Director of Finance in Barbados who later went on to become Governor of the Central Bank, Cox served as Deputy Commonwealth Secretary General in London. He lives in Quebec and is an economic adviser to the Barbados Government.
In this week’s Big Interview, he spoke with NATION North American correspondent Tony Best primarily on how Barbados will be affected by the struggling economies in the United States and Europe, and what could happen if there were no agreement in Congress on the debt ceiling and the US defaulted on its financial obligations.
Q: Would you describe the international economic environment and its effects on Barbados?
Cox: I would describe it as gathering storm clouds. It is not a situation that makes one feel full of confidence. It’s bothersome and you hope it will get better, but on balance, the expectation is that it would get worse before it improves.
Q: Where does Barbados fit into the storm?
Cox: Barbados would be in the eye of the storm, not because of anything that it has done but because it is a small country and it can hardly expect to escape if there is a global meltdown.
I know there are views that niche and high end markets such as Barbados are the last to be affected and that given our size it’s possible we could survive on the niche markets. But I am always in favour of diversifying markets. I am always in favour of not putting all your eggs in one basket.
Q: Can Barbados grow itself out of the effects of the storm?
Cox: You can attempt to do so, but if your growth is foreign exchange consuming rather than foreign exchange earning, that would not be the way to go. That has its own dangers.
Q: Europe is experiencing major economic difficulties. Should Bajans be worried about Europe?
Cox: Yes. Barbados
has in the past been very successful in using the international market for sovereign debt and to the extent that the market is compromised by events in Europe – the Greek debt crisis, problems in Italy, Spain, Portugal and Ireland – that situation will have an adverse impact on the sovereign debt market. Barbados should be following what’s happening there because of its impact on the international market.
Q: How about the United States and the prospects of calamity if there is no agreement on the debt ceiling? What would be the impact on Barbados?
Cox: Discussions on raising the debt ceiling would have implications for Barbados. Unless they are resolved speedily, they would have serious implications for countries like Barbados that hold reserves in US dollars. There is the liquidity of the market and the value of the US dollar relative to other currencies. We have no capacity to influence these events and they are entirely beyond the control of policymakers in Barbados.
The events could derail the tentative recovery which was detailed in the Barbados Central Bank’s latest outlook.
Q: How come?
Cox: The impact would be through a lack of mobility in the international capital market. We depend very heavily on that market for inflows on investment capital and also for borrowings. To the extent that the climate in the market is not healthy, then that’s how the impact would be felt on Barbados.
Q: What would be the effect on Barbados’ foreign reserves?
Cox: In the case of the United States and the debt ceiling and the question of the US defaulting on financial obligations, it would be an Armageddon scenario.
If the US were to default on its debt, for instance, that means the value of our (Barbados’) foreign exchange reserves held in US dollars would be zero, really. They would not be liquid and we would not be able to use them
to meet the transactions that are normally met by drawing on those reserves.
As for the Euro, its weakening as a result of the Italian and Greek debt crises and its possible spread to other countries, the situation would have an impact on tourist travel from Europe to the Caribbean. It would be felt in the service industry, tourism in particular.
That would be the case in the US as well. It would really be in tourism and the immobility in the capital markets.
Q: How about Barbados’ exchange rate?
Cox: That wouldn’t matter because the Barbados dollar is tied to the United States dollar and it would float against other currencies as the US dollar floats. The exchange rate wouldn’t be a solution to those kinds of problems. Barbados could not have any impact on mobility in the capital market via the exchange rate.
These would be structural rigidities that would need change of legislation in the United States, namely increasing the debt limit, and would need the introduction of austerity measures in Europe. You are aware of the riots that attended the debate in Greece on the austerity packages. The exchange rate would be entirely inconsequential to that debate.
Q: Why the word ‘Armageddon’?
Cox: August 2 is the deadline for raising the US debt ceiling. The president has some residual powers which can be used to avert a meltdown or default. The perception of failure would be quite problematic for the international capital markets.
Remember the US government is the largest pool of liquid debt in the world. If the liquidity of that pool is threatened, then the impact would be quite severe.
The US is the place where many countries still hold their foreign reserves and many investors hold assets in US government debt with the full faith and confidence in the US Treasury. If that confidence and faith [are] undermined by the failure of the US lawmakers, then it would really make the collapse of Lehman Brothers a walk in the park.
Q: Are Bajans fully aware of the looming crisis?
Cox: The people who need to understand it are aware of it and understand it.
The challenge is communicating it to the person in the street.
The policymakers are seized with the immediacy of these issues, or they ought to be.
Q: But what can we do about ‘Armageddon’?
Cox: Can you move your reserves out of US dollars into another currency? You can do that. You can do some currency diversification and I think that’s the policy that everybody would be aware of. But you have problems with the Euro as well. You move out of dollars and go into the Euro, there are problems there.
Q: How about gold?
Cox: Gold has held its value but the problem with gold is liquidity. When you need to liquidate it, you would need dollars or Euros to make settlements. The question always comes down to the liquidity of the assets.
If you had gold you could do some swaps, you could borrow against it but you still run the risk that gold behaves like a financial asset and sometimes like a commodity.
Q: What’s the future of Barbados’ offshore financial services sector?
Cox: There is going to be much more severe competition for a smaller pie because of the policies in the source countries. That’s the thing which is going to have an impact on the size of the sector in Barbados.
Q: How about South America? Is that region a part of the equation?
Cox: Barbados has been looking at tax treaties with Latin American countries. One was signed with Mexico. We have been talking about negotiations with Brazil. We have to look north, south, east and west. You can’t afford to ignore any quadrant.
Q: Where do China and India fit into the equation?
Cox: We have a double taxation treaty with China and it was a strategic move by the late David Thompson to have a former Prime Minister of Barbados, Sir Lloyd Sandiford, assigned as our Ambassador to China. We would like to be designated as a destination for Chinese tourists. India and China are two of the important drivers of the world economy today.
