Richards: Borrow 400-800M, 3 Years Of Deficits

June 20, 2013

[Updated with video] The next bond issue, expected this summer, is anticipated to cover three years of operating deficits, and the government will borrow in the range of $400-$800 million, Finance Minister Bob Richards said this afternoon [June 20].

He said that borrowing three years worth of deficits now will save tens of millions of dollars in financing costs.

“It is important to emphasize that this Minister and this OBA government is unequivocally committed to the elimination of government deficits,” said Mr Richards. “However, in the meantime it is forecast that the government will likely run operational deficits in the next three to four years.”

Minister Richards said the “although the previous administration gave lip service to the inauguration of a medium term financial plan,” their actual method of debt financing remained unchanged, borrowing money either through bank lines or bond issues for the current fiscal year.

“There has never been multi-year financing, until now,” continued the Minister. “The next bond issue, expected this summer, is anticipated to cover three years’ government operating deficits. Therefore the amount raised will be in the range of $400-$800 million.

“We judge that we are in the last phase of the ultra- low US$ interest rate cycle. As the US economy gains strength, US$ interest rates, and therefore bond yields and borrowing costs, are highly likely to rise.

“Borrowing three years’ worth of deficits now will save the government tens of millions of dollars of financing costs,” continued Minister Richards. “This will give us certainty of financing as well. Instead of borrowing on a year to year basis in a rising market, we will be locking in three years at low rates.

“This strategy will save the treasury between $20-40 million depending on what interest rates do in the next 3 years. One thing we know they’re not going down. Saving that kind of money reduces the debt.”

The full statement from Minister Richards is below

Good afternoon,

The MOF has been reviewing its borrowing arrangements and practices used to finance ongoing budget deficits.

It is important to emphasize that this Minister and this OBA government is unequivocally committed to the elimination of government deficits. Steps toward that objective are still a work in process and will be revealed at the appropriate time.

However, in the meantime it is forecast that the government will likely run operational deficits in the next three to four years.

The purpose of this press conference is to announce a revised strategy as to how the government actually finances the expected deficits in the medium term.

Although the previous administration gave lip service to the inauguration of a medium term financial plan, their actual method of debt financing remained unchanged: i.e. the method was to borrow money either through bank lines or bond issues for the current fiscal year. There has never been multi-year financing, until now.

The next bond issue, expected this summer, is anticipated to cover three years’ government operating deficits.

Therefore the amount raised will be in the range of $400-$800 million.

The bond issue will consist of at least two separate tranches

  • A US$ institutional tranche.
  • A BD$ local tranche.

There will likely be three distinct investor groups targeted for subscription:

  • Local retail BD$ investors.
  • Bermuda based US$ institutional investors.
  • Global institutional investors.

Why have we decided to make this strategic change?

We judge that we are in the last phase of the ultra- low US$ interest rate cycle. As the US economy gains strength, US$ interest rates, and therefore bond yields and borrowing costs, are highly likely to rise.

Borrowing three years’ worth of deficits now will save the government tens of millions of dollars of financing costs.

This will give us certainty of financing as well. Instead of borrowing on a year to year basis in a rising market, we will be locking in three years at low rates.

It will demonstrate that we are asserting control of our deficit situation, instead of being constantly reactive.

It will also demonstrate to rating agencies that we are tapping the local money markets, as they have repeatedly recommended.

The Ministry is currently reviewing offers from a variety of investment banks to manage this upcoming bond issue and will announce the successful manager/managers in due course.

We are confident that there is significant appetite in the local retail market for government bonds.

We have already apprised the rating agencies of our change in strategy.

Some of you may be shocked by this announcement and the size of the issue, but the logic of this strategy, as stated, is easy for anyone to understand.

Bermudians may well ask, “What about the debt ceiling and the new debt rules only recently put in place. Are you not breaking your own rules?”

The answer is no, we are not.

Public debt is defined by a simple formula: gross debt outstanding minus money in the Sinking Fund.

We intend to borrow three years’ worth of deficits but place two years’ worth in the Sinking Fund. This mean that the Public Debt, as defined, will only rise by the one year’s worth of deficits. We will take money out of the Sinking Fund as needed to finance the deficit.

The money placed in the Sinking Fund from this bond issue will be prudently invested until it is needed.

Bermudians may well also ask, “You were elected to reduce the debt, not increase it. You’re reneging on your word!”

The answer to this question is in two parts:

  • This strategy will save the treasury between $20-40 million depending on what interest rates do in the next 3 years. One thing we know they’re not going down. Saving that kind of money reduces the debt.
  • Every thinking person must accept that the debt will not be reduced over-night. This is money we would have had to borrow anyway, it is only a question of timing. We choose now because we have the advantage.

Lastly we will need to amend the Government Loans Act to allow money to be deposited and extracted from the Sinking Fund, as it was not designed for multiple year budgeting. These amendments will be laid before the House shortly.

Thank You.

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Comments (23)

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  1. ontherivet says:

    There are tons of W&E doing nothing all day, bad atitude bus drivers get rid of them – the PRIVATE SECTOR CAN AND WILL DO A BETTER JOB!

    Also use those panzy prisoners at westgate for labor projects. pot hole repairs public restroom cleaning tree trimming before the storms etc.

    and I havesaid it a million times has anyone ventured to find out why our government is borrowing money from a private banking institution? I did not agree to that contract – nor did my child buy I am subject to the debt that (to me) illegal contract produces?

    I bet after this whole “tax haven” fiasco richards might be contemplating independence from the crown – but trying to figure a way to call it something else…but the fear will always keep the cattle in line – we absolutely NEED the USA and England – the most currupt nations in human history – any harbor in a storm it seems…

    • Blah says:

      Agreed on the fact that busses/ferries should be privatized and that prisoners should be put to work. Would save government a decent amount of money imo

    • We have to borrow the money not to keep us afloat, but the very thought that some of them could soon end up on our level is to scary for them.

      In the real world countries borrow all the time, and this time I am waiting for a joker to rise up and say they are doing it because P.L.P put us in debt.

      So to the joker before he springs up his head, sit down and be quiet because the O.B.A is in no position to point finger, because they recognize the seriousness of were our country really is, and no amount of game blaming will stop what is happening to us and NO it is no quick fix out there for us.

      Lets just pray and hope Bermuda survives this one, our pride and arrogance has been in existence for a long time but lets stop adding all the stupidity with it.

    • Robert says:

      So your solution is to put more bermubians out of work ?!!! Well done dummy !!!!

    • I’ll give you my vote “ontherivet” but I will disagree that the O.B.A. will seek independence from the crown.

  2. Devils Advocate says:

    3 Years? Damn, So the recession isnt over and wont be for 5+ years maybe never, I need to learn Mandarin.

  3. justsayin says:

    Tourism needs a gigantic boost ASAP. We need to offer a new product and sell it fast!!

  4. pilot011 says:

    Bermudians of color have always struggled to make ends meet it’s nothing new. PLP may have contributed to the debt but guess what at least they put programs in place for Bermudians such as Free Ferry, bus, Bermuda College, day care and the list goes on. What did UPB do for us NOTHING that’s why they had a surplus nothing was spent on socials program for Bermudians. Go back in history and check and see what they did for people of color. NOTHING.

    • Keepin' it Real...4Real! says:

      you fergot one thing hamma!…I and everyone else, plus YOU!!…owe over 2Billion Dollars…Why do you people think that it’s gonna get better..? We havent even touched rock bottom yet…not 13% unemployment or what ever the correct number may be….im talking 85% unemployed ..homelessness like you have NEVER seen ….sighhhh! Coming Soon to a Bermuda near you. If any of you have the attention span exceeding 10 secs. then this may catch your attention.
      https://www.youtube.com/watch?v=MkAn3VIe1yQ

    • Bermuda Male says:

      And all those supposed freebies were either eliminated or scaled severely back or simply never implemented by the PLP. And that includesngivernmet support to mirrorsmandnseveal charities.

      And the free public transportation promise ws only ever extended to all students. Not just black students.

      But no matter your obsession with color the debtors don’t care as long as they are paid back.

    • media says:

      Apart from making sure everyone had a job and creating the perfect economic conditions to grow IB into the envy of every other island community in the World. Which actually produced all that money that the PLP squandered away like there was no tomorrow.

  5. swing voter says:

    I can’t believe 4 years of borrow and spend has led to this. Its depressing. How could anyone not admit that borrow and spend leads to more of the same. Can’t blame uncle Bob, but I’m old enough to remember when the island was run effectively without borrowing, and everyone was able to get 2 jobs, pay their bills and travel 4 times per year. If a blue color worker wanted a cottage with a back yard, he can have it if he worked hard enough……complain all you want, that damned UBP was a lot more palatable than 2008 – 2012

    • Did he do it? says:

      Agreed

      • truthfully says:

        And you believe the government is at fault for the economy which was impacted by the global economy. Why don’t you swing your way and read some articles and get a grip on foreign trade and international business. But I’ll be kind of enough to break it down for you. There is no “Magic Bullet”. If you understand how heavily this island relies on other countries then you would stop pointing your fingers at MPs and political parties and look at the greater picture. Take off you blinders.

    • What’s that ole sayin’, “The more you wriggle the deeper you’ll sink”.

  6. No More Deception/Accountability Please says:

    I have always maintained that a 10 year plan is needed to turn the country around but many bought the political rhetoric of the OBA (hook, line & sinker).

    They told us that there was no recession and it was the fault of the PLP and their policies. They promised jobs, a rejuvenated economy and a reduction in debt. Many believed! For the last 6 months, I have seen a lot of empty promises and many mis-steps. If we borrow now for 3 years, what is the prognosis come year 5. Forget the 3 year plan that the Minister is touting, where is the election pledge of reducing/getting rid of the debt. I urge all, please do not give the OBA a free ride in the name of PLP’s failed policies. We must demand more. Our country cannot afford any more empty promises.

    Now before you go spouting venom. I was firmly against the PLP continuing in government for a second more and I knew change was coming. I also don’t expect the OBA to turn matters around in 6 months but the sooner we start holding our leaders accountable, then the sooner we can get onto the 10 year road of turning our country around.

    There are a lot of ignorant people (on both sides of the political spectrum and in between) in Bermuda that assume that if we hold fast to our ‘sides’ then we will be better off as a country. The truth is simply this: We need to appreciate that Bermuda cannot be turned around at the expense of any group. It cannot be purely economics. It cannot be purely social. We need a proper balance of both. This proper balance cannot be achieved until we have the input of all ‘sides’. It is amazing to me how many (from the OBA & the PLP) don’t get it. If you think it’s all about economy then go back to 2008 when things were boiling and note the social ills that our country had and was festering. Social ills are not born overnight. If you think all should be wrapped in a social agenda, then look at the many who now hold out their hands after years of social programs.

    We need the truth from both sides and the ‘true’ Bermudians (those who have the country’s best interest at heart) to demand more.

    If the above doesn’t motivate you then may those of the OBA persuasion ponder this: The OBA will only have one term of office if we don’t hold them to their promises. If they deliver on their promises then I believe that even the PLP die-hards can be swayed. Don’t forget how slim the margin was! It is in everyone’s best interest to hold the OBA accountable!

    And to the those of the PLP persuasion ponder this: This is not a time for ‘I told you so’. For the next four years, we cannot afford any more uneducated children. The foreign employment numbers will continue to increase if we don’t produce citizens to take jobs at all levels. Bermudian mortgages will continue to fail. Continued social fall-out is sure if we don’t hold the OBA accountable!

    My fellow Bermudians, politics is politics and until we get off our fanny and demand more (regardless of our political affiliation), I firmly believe that we are going to stretch this even beyond my original projection of 10 years.

  7. Bermyman says:

    How do you propose that we reduce the debt level in the short term without reducing the size of the civil service which will ultimately lead to large scale social problems? Sure you can have a 10 year plan but if you are only government for 5 then what difference does it make. I think you’re jumping the gun a bit, Bob knows we will need to borrow now and within the next 3 years until the Government has figured out ways via the SAGE commission to cut its operating costs and also increase revenues to payback debt. At the same time the introduction of gaming tourism and business alike could be a big source of new revenue. But this will take a few years to come to fruition.

    What we are still experiencing now is the fallout from the previous economic model inherited from the PLP, which was unsustainable and the writing was on the wall for several years but the previous government failed to make any changes.

    There was a large degree of incompetence by the previous finance minister and in reality the PLP government as a whole. Bob Richards is more than qualified to be in the position he is in, we don’t get much better than him in terms of knowing what we need to do and when we need to do it. He has a mammoth task on his hands and the whole nation needs to realize this.

  8. Bermewjan says:

    There’s a reason that we have had yearly financing in the past – it is so that no one MP can access and abuse a significant amount of funding and then abuse the system to their own gain and to Bermuda’s detriment. What is Bob going to do with the $600m not required this year that he plans to “prudently invest”? Is he going to risk it all on ILS in the hope that if his luck holds he will be able to get us out of our debt load quicker?

    While this may seem a good idea, I’m not sure I buy the “prudently invest part”. Let’s face it, the OBA really doesn’t have a chance of being re-elected unless they do something magnificent in relation to the debt burden, so why would Bob “prudently” invest it? His motivation is more likely to bet the house in the hope that his horse comes in on ILS – after all the amount of premiums that can be written against a capital holding of $600m is huge… not to mention the massive management fees the Investment Manager (Bob?) and the Broker would receive. The fees alone would make any concept of previous government corruption pale in comparison.

    Do you folks really think that giving $600m of government leveraged funds to an average investment manager like Bob, who will only gain personally if he wins or looses his gambles is a good idea?!?!

    Don’t be so naive!