Burchall: “Over The Hurdle, Into The Wall”

August 19, 2014

[Opinion column written by Larry Burchall] By December 2017, that $800 million that Government borrowed in December 2013, plus the $396 million ‘fluff money’ left over and put in between 2012 and 2017, will have been used up.

April 1st 2017 will find the Bermuda Government beginning a scramble for millions to get through to FY 2020/21 and, particularly, 20th July 2020. On 20th July 2020, that $500 million July 2010 ten year bond bundle becomes due for payment – and the $500 million to repay it won’t be there. That $500 million is the wall.

However, before Government reaches that 20720 wall, Government must get through FY 2017/18; then into and through FY 2018/19; after that, into and through FY 2019/20 and pay off $180 million in Senior Notes by 10th November 2019. That $180 million is the hurdle.

Given that the Bermuda Government will come up short of funds in FY 2017/18 [see last week], Government will have to make really deep cuts in its expenses and force a more or less balanced budget in 2017/18 and for each of the next two FY’s; OR, Government will have to borrow funds again.

Since 2010, Government has displayed neither the courage nor the good sense to seriously cut Government expenses. So it is unlikely that Government will cut more deeply in the future. So more borrowing lies ahead. How much?

If, by Christmas 2017, Government goes begging again, Government can borrow up to $585 million to take it through 2017/18 and the next two years. More than $585 million will require raising the Debt ceiling from its already astronomical $2.5 billion. However, an added $585 million will, by 2020, have us owing more than we owed on May 1st this year. Here’s how:

  • National Debt at 1st May 2014 – $2,305,000,000
  • Less six Senior Notes paid off in 2014, 2016, 2019 – [$390,000,000]
  • National Debt balance as at November 11th 2019 – $1,915,000,000
  • New Debt added during FY 2017/18 – $585,000,000
  • National Debt at 1st May 2020 – $2,500,000,000

Will a 2017 change of Governing Party modify that arithmetic? No. Switch Premiers? No. Get a different, ninth, Minister for Finance? No. Arithmetic doesn’t give a damn about politics!

But that’s just the internal facts and factors. What about the external factors? The foreign lenders?

Foreign lenders will become aware of a Bermuda Government coming back for another big bundle of their money even while the Bermuda Government is already squatting on almost $2 billion of their money. “More” will mean Government squatting on $2.5 billion of their money. Foreign lenders will look more closely at repayment. When they do, they will see that the Bermuda Government will be unable to repay the $500 million bundle that comes due on 20720.

Foreign lenders will certainly seek a higher rate of interest for the new $585 million. They may well require 7% – 8% [more?] for this new $585 million tranche.

With that rate of annual interest, with the certainty that all of Bermuda’s future borrowings will attract similar or higher rates of interest, any post-2017 Bermuda Government will be looking at total annual interest costs in excess of $175,000,000 from 2020 onwards. Adding the $62,500,000 that must be set aside in the Sinking Fund means Government’s full Debt Service Cost [DSC] will hit $237 million a year. [And don’t forget the millions that must be found to pay for that KEMH/PPP…]

Bermuda is in a debt trap. Bermuda faces a hurdle then a wall. Bermuda got there primarily as a consequence of ten back-to-back years of financial non-management on the part of Government’s team of top financial managers. The steady build-up of $2,305,000,000 [billion] in Debt between 2004 and 2013 is the DNA and CCTV evidence of their lack of financial competence as displayed by those ten consecutive years of financial non-management.

When, inevitably, Bermuda goes begging again in 2017, the Bermuda Government will end up – ultimately – having to apply the December 2013 ‘Barbados solution’.

For Bermuda and Bermudians, there is only one way over the hurdle, through or over the wall, and out of the trap.

Grow GDP. How? Grow ResPop. Growing ResPop is the start point.

Why? Because of how Bermuda’s economy actually functions and has been functioning since 1994.

Can Tourism do it? Nope.

Since 2000, annual total revenue from Tourism has averaged $397 million [$391m in 2013]. For Tourism to make the kind of difference required, total revenue from Tourism would have to rise to at least $1.0 billion.

That $1.0 billion in total Tourism revenue requires total Air Arrivals to reach and stay above 675,000 [in 2013 they were at 236,000 with highest ever at 491,000 in 1980]. Simultaneously, Cruise Arrivals would have to reach and stay around 425,000 [ten year average is 324,000].

Acknowledging that Tourists now buy Bermuda as a cheap Cruise Destination – not a Land Destination – it is unlikely that Tourism can or will deliver annual revenue of $1.0 billion.

Above all, there is one critical and still unmet need. The Bermuda Government, all the people of Bermuda, and Bermuda’s entire business community need to learn about and understand the one thing that few understand.

How Bermuda’s economy actually works.

Not how we think it works; not how we feel it works; not how we want it to work – but how Bermuda’s economy actually does work, and has been working – particularly since 1994.

- Larry Burchall

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  1. Economics 101 says:

    Mr Burchall,

    Once again a concise piece full of facts and the simple fact is we need more people in our island to pay into the system to stave off the inevitable at this point. It is truly unfortunate that there is a large contingent in Bermuda that simply doesn’t understand how our economy works, functions and thrives. That is not an insult, it is a simple fact.

    So many supporters of a particular Party go on about achieving the highest GDP in Bermuda’s 400+ year history. But what these individuals fail to understand is that was achieved with the largest population the island has ever experienced which was brought about the issuance of more work permits by the same Party that now apparently abhors foreigners while wanting to kick out people that have been in this island for 25+ years. Can they not see with less people paying into the ‘system’ that our economic situation will continue to get worse and worse? Less people equals less taxes equals less Government revenue equals greater deficits/debts and a greater need to ‘trim the fat’ just to survive.

    And the sad thing is I haven’t even touched on the fact that more than 50% of all Government revenues are now simply paying civil servant wages and debt servicing payments. This means less and less money to pay into social programs and updating infrastructure. I wish the Government, you or any other individual with economic sense would hold works shops that spell out the issues in a clear and concise manner how the Bermuda economy works and what we need to do to fix it.

    Good luck Bermuda. We all need it.

    • Redo says:

      Couldn’t have said it better. Now we just need to help everyone see this light. Hating PRCs and guest workers is killing us! Do you like being unemployed Bermuda? No? Then get your heads out of the sand and understand that we NEED PRCs and guest workers!! THEY PAY OUR BILLS!

      • mj says:

        Prc’s and guest workers don’t necessarily bring in foreign currency so stop the shuck and jive talk… If Prc’s and guest workers are employed in businesses they are getting paid, if they wer to be replaced by Bermudians we probably would have more in our coffers since guest workers tend to send most of their money overseas.. We need a constant stream of revenue via Tourism and a more stable economy worldwide to suffice our international business who are pract-near insatiable…. Bermudians need to be put to the forefront of their country in order to revitalize our tourism and allow outsiders to know who we are and to return for the same reason they came, to learn about us “Bermudians”. Stop overplaying the role of guest workers and Prc;s who are only rolled over workers, benefitting from our economy. Mr. Burchall is well aware of the economic situation world wide. The USofA , Britian, Japan ,ect. run on perpetual debt, Most of the world runs their economy on debt, Bermudas debt is actually in the lowest percentages world wide when it comes to monies borrowed.. THE WORLD HAS BEEN RUNNING IN DEBT FOR DECADES!!!!The banks rely on people borrowing in order to receive cash.. They basically extend lines of credits or provide”bridges”, for people that borrow large sums of money for large businesses who sometimes do not repay their loans and cause us to be in greater debt.. As for tourism we obviously have been paying out far too much money for the wrong persons to promote our island, since they have obviously sold us as a cheap destination (cruise) rather than a land destination.. maybe the investments from the BTA should have gone to the locals who can come up with locally made goods to start our own industry, whether it be fashion, food, carpentry or other ideas, that will provide tourist with a true Bermuda experience.. There should have been monies made available for Bermudians to open business rather than invest money in people that just want to collect their paychecks for services not-rendered.

        • Kangoocar says:

          @mj, you can’t be serious with what you just wrote???? You and all those that think like you are seriously misguided!!!! First off, the money that foreigners earn in the IB sector is MONEY EARNED FROM ELSEWHERE!!!! I actually make a good living off them and in turn 5 other Bermudians do as well, they are my EMPLOYEES!!!! Just because the world lives in debt that does not make it right for us, and do you know why??? Of course you don’t, so I will tell you!!! Bermudas $$$$ are worthless anywhere in the world except for Bermuda!!! Our debt and every cent of it is borrowed in $ US !!!!! We can’t just print money to pay for our ever growing debt!!! And when it comes to your nonsense about money being given to Bermudians to open their own businesses???? May I ask you, if we don’t grow our population, who in the heck are they going to sell their service/wares to??? The plp has dumbed your type down so much that you don’t even know from which way the sun rises everyday!!! There is a lot more I can say to you but it is obvious that it would sail right over your head!!!
          I am just thankful that Larry Burchall is saying this over and over and I am sure his message is getting through to those that actually can think for themselves, which obviously would exclude you!!!!!

        • Really? says:

          If Bermuda continues this dangerous path of growing debt it will not be long before we become insolvent. At this point all hope is lost.

          Also, Japan is on the verge of hyperinflation. I don’t think you should be drawing any positive comparisons from their economy.

        • Creamy says:

          Take a look at Greece and Cyprus, and tell us whether you think more debt is good.
          Idiot.

        • Wayne says:

          So to run your life owing others is a good thing?Problem is when you owe debt you can not move forward!!

        • Curious says:

          While not completely wrong, what you wrote it pretty wrong.
          There are essentially two types of foreign workers, those that work in IB and those that don’t.
          When you lump them in together and make blanket statements like ‘they send all their money home’ it is wrong. What you’ve confused is the blue collar foreign labour that may/or may not be replaceable by Bermudian labour. Certainly keeping this money circulating amongst Bermudians instead of shipped overseas would be beneficial.
          The IB foreign labour is essential to our current economy and has a follow on to the amount of debt that we have. The positions that foreign IB workers fill largely cannot be filled by qualified Bermudians. These positions create wealth since they pay rent, buy groceries, pay BELCO (god help them), eat at restaurants, but cars, etc. etc. etc. This money goes to Bermudians and gets used by them for the same things and it goes on in a cycle.
          If you removed the IB foreigners from the equation it isnt a matter of replacing them with Bermudians, it is a matter of that money not existing in the first place. Thus Bermuda would not benefit from the money multiplier on their dollars. IB is 80% of our foreign currency income. You say we have low % of GDP debt levels (Debt/GDP), but if you destroy IB you massively decrease the denominator of that equation and we would quickly be matching the debt levels of countries that were bailed out.

    • Portia says:

      The truth is, the problem is not with the “contingent” of people you claim are ignorant of Bermuda’s ecomony. We all know that Bermuda’s money comes from IB. Bermuda has been bringing in workers to supplement its labour force since long before 1994 – that’s been happening for many, many years.

      The problem is that Bermuda had it good, but we simply became too expensive to do business here. And I’m not taking just about the payroll tax hike that Paula Cox put through – jobs and companies were leaving long before that. The high cost of living, the expensive goods and services, and the extremely high salaries that are needed to keep workers here simply made us less desirable as a business location. Frankly, we got greedy. Especially in the housing sector, with many property owners charging several thousand a month to companies for their expat housing allowances.

      These companies are all about the bottom line. When it becomes necessary to tighten the belt, or avoid looming tax threats from the U.S., the companies are going to do what they need to do to survive. And the truth is, there are other jurisdictions out there that do what we do, but cheaper, and just as efficiently.

      Look at how many jobs have left for Canada, especially in the IT sector. Companies don’t want to pay $65,000 for an IT worker when they can get someone in Canada to do it for $35,000. The ease of technology has worked against us as well. Now many jobs can be done from overseas with cheaper workers. This is how companies protect their bottom line. When you last called your bank, did you have to deal with someone in India?

      I enjoy Mr. Burchall’s articles, but I think the truth is, we need to look at not just what the PLP did wrong, but realize that the landscape of business changed, and we did not keep up, we did not keep ourselves competitive. And until we do, we will not grow economically.

      • mj says:

        Like your honesty Portia…hmmmmm nice change, glad not everone just goes along with the ok doky withour thinking for themselves no matter what party is in power, ultimately the civil, and private sectors run Bermuda, mp’s just looking to get paid for legislation that can sometimes be the handicap.

      • Truth(Original) says:

        I agree with that Portia. We have to also acknowledge that the PLP stance was/is anti-expat. The bad attitude, nasty comments made by PLP Ministers and anti-expat policies made the decision to shut down operations in Bermuda very easy for many companies. Until they understand that truth, their attitudes will always be a threat to our efforts of a recovery. We must change our attitudes towards our guest workers and the companies that employ them. They are not our enemies and we have managed to snatch defeat from the jaws of victory because of shortsightedness, ignorance and plain old stinking attitude.

      • Kangoocar says:

        @portia, as usual I disagree with you, when you talk about expense to run a business in BDA you need to get out more! The costs of running these exact businesses in other cities are just as much if not more and when it comes to the taxes levied on them in Other jurisdictions it pushes them higher than us!! Bermudas location in the world gives us a huge advantage, all we lack is the expertise needed by these companies!!!! That is were the plp failed, the plp brainwashed their supporters into thinking that we didn’t need foreigners and to this day are still spewing that nonsense and after 5000 of them left we are now in a dire situation and the very people that supported the plp misinformation are the very ones suffering the most???? My business caters to the IB sector and locals, the split is about 75% IB and 25% local, I have had many a conversation with the IB sector and I happen to know what I am talking about!!! I have been told over and over the REAL reason of the mass exodus and it had nothing to do with the world economy ( because they were effected very little by it ) and it had everything to do with the policies of the PREVIOUS government, the plp!!!!

      • truth now says:

        Thanks @Portia for your comment. I must say that Bermuda failed to diversified our economy. We continue to only depended upon IB and tourism, which are changing. We failed to plan and look ahead of a changing economy. The current government is also failing to look for alternative sources of revenue. Big Tax breaks given to big business while it all falls on the small man. Portia, as you so clearly point out that business changed, and we did not keep up or even expect change. Change will come. “Who Moved My Cheese?”

        But Mr Burchall did promise us pre-election that OBA had all the solutions to our woes, but looks like based upon his article this is not so.

      • Justin says:

        You managed to write 5 whole paragraphs without mentioning that the PLP implemented terms limits, told foreigners to stay out of our politics and even went so far as to contemplate that foreigners wouldn’t be able to have a car!

    • Truth says:

      Simply having more foreign workers on the island does not help to solve Bermuda’s economic woes. The core of the issue is jobs! The reason we had an increase in expat workers during the boom years was because the level of jobs from primarily the international business arena exapnded. Economic growth in Bermuda is primarily driven by services that support the global economy. Simply increasing our population will not spur broad economic growth. Rather broad economic growth spurs a growth in our population.

      Note, that this post is not anti-foreigner as I accept that high-skilled labor (wherever it derives) is vital to Bermuda’s economy.

    • Wow says:

      Burchall for Finance Minister. Are we paying attention ?

    • “And the sad thing is I haven’t even touched on the fact that more than 50% of all Government revenues are now simply paying civil servant wages and debt servicing payments. This means less and less money to pay into social programs and updating infrastructure. I wish the Government, you or any other individual with economic sense would hold works shops that spell out the issues in a clear and concise manner how the Bermuda economy works and what we need to do to fix it”.
      If the vast amount of Bermudas general public fail to read the full article,(above) written by Mr. Larry Burchall at least will they take time to read the paragraph above? :-(

  2. Justin says:

    I really like that Larry has come over to Bernews. I felt that it was a pity that his opinion pieces didn’t get the exposure they deserved with The Bermuda Sun. I’m looking forward to the ensuing dialogue that his opinion pieces are bound to create in the future!

  3. Navin Johnson says:

    cut the bloated Civil Service…

  4. St. Davids says:

    It’s a hard situation. Economics did not make sense to me really until I started to work in the financial industry. It is not easy to explain to people how it works when they don’t work or involve themselves in how our or any economy works. It is no one’s fault, when things are good the economy is not a top priority, but when things are bad it is a top priority. When it is a top priority, the priority happens to be easing the pain of the suffering. Unfortunately we did not save to help the suffering during these times. It was simply poor fiscal management. The PLP took a gamble, and borrowed against future earnings, the recession took hold and we are where we are. Again not 100% the PLP’s fault, but they had never experienced a large recession while in power and just didn’t know what to do.

    Having said all that it is rather frustrating when people create redlines to privatization. What are your concerns? What would privatization do to the workers of Bermuda? It might make them more accountable to their private sector employer? Is that what we are afraid of? Maybe not, maybe someone can explain to me why this is such a bad thing for Bermuda.

    The writing is on the wall, we have to do something drastic, very drastic. If it is not cutting the civil service, which I do not see as a panacea, then it has to be population growth, plain and simple.

    • The Underground Movement says:

      The PLP lacked the vision and financial forecast until they realised that they are borrowing to much to
      cover to much. – they ran Bermuda like money grew on trees.
      The first sign of trouble was in 2006 when the US economy was on a huge decline to the point of the worst recession in decades.
      The PLP failed to understand when the base of our ecconomy falls [ the USA ] we fall.
      Personally I don’t think that the OBA can fix all the problems we have and because there is no money.

      All Mr.Burchall is saying is that – the Money dos’nt grow on tree’s ! unfortunately there are so many that don’t realize this.

  5. That's the first step says:

    That’s a first step and absolutely necessary. When over half the country’s income goes to pay salaries and service the debt something has got to give and, since it’s impossible to do anything about the debt service there’s only one place left to go.

    And without concrete evidence that something is being done to reduce spending the international debt markets are not going to be kind when Bermuda looks to borrow more money in the relatively near future.

  6. Common Sense says:

    First class article by Larry Burchall. He has consistently been beating the warning drums, and when he did so during the last Government’s term in office he was constantly castigated by numerous bloggers for exagerrating the situation or being over critical of the PLP Government. He is still beating the warning drums, regardless of who is in power, and his drums need to be heard across the length and breadth of our Island. Can someone tell me if there is anyone out there who makes more sense about our economic situation than does Larry? I think not.

  7. Keepin' it Real!...4Real! says:

    why are people still here debating a mute point ..? Mr. Burchalls message unequivocally(in a way that is not subject to conditions or exceptions)has been laid out in front of YOUR eyes, yet youuuu…i just don’t get it. i guess none of you have ever sat an exam then …what?..you open the test booklet then want to debate what IS written!..huh? What Larry has provided you with is THE STONE COLD TRUTH…THERE IS NO QUICK FIX BY DEVIATING AWAY FROM THE CAUSE OF THE PROBLEM…eliminate the cause and you no longer have a problem…smh

  8. Keepin' it Real!...4Real! says:

    just think of this article and change the names Bda. Govt or Nat. Debt(as the bureaucrats like to spew)to YOUR name and YOU are sitting on the other side of a Bankers Desk and he is explaining YOUR situation…need i go on ..?

  9. Bermuda123 says:

    Great article – congratulations Larry. We need two things niow – first to understand the broad economic plan of the Government, rather than individual policies, and second the education of those who do not understand our economy. Bermuda needs everyone pulling in the same direction and we need to get everyone on the team. We do not have the luxury of politics in this – please put it to one side.

  10. Rumforbreakfast says:

    I might just be Larry Burchall’s biggest fan : )

  11. Alvin Williams says:

    Of course the elephant in the room which every one is loath to talk about is Bermuda’s tax system which is long over due for reform.
    I fail to see how all these tax break give away which this government has been engaging in is going to do anything in lowing Bermuda’s budget deficit? Social assistance for business concerns; more economic sacrifice and financial burdens for the wage earner.

    • Creamy says:

      When you talk about “more financial burdens for the wage earner”, you’re talking about the 17% raise in union fees, right?

    • Bermy Boy says:

      Alvin – changing the taxes will only shift income monies it will not increase the income. If this were to happen those that enjoy the set up here could leave and then we have less income. After reading the article it is really clear that the Govt. has to look at reducing the expenses of all Govt. Dept. It is a simple matter of income and expenses.

    • campervan says:

      tax reform? thanks for the tip Alvin.
      A timely reminder to avoid buy anything on the rock that can’t be carried with you when tax man chases us out of town.

    • Double D says:

      You can’t multiply wealth by dividing it.

    • serengeti says:

      The Laffer Curve, Alvin.

      In Bermuda it definitely applies. Paula Cox proved it.

  12. Legal Eagle says:

    And Bermudian banks are a big part of the problem! They operate in unison like a ‘cartel’(no competition) and have to have the biggest SPREAD between interest paid on accts-+ interest demanded for loans/mortgages(if you can get one) in the world! And add-their ‘fees’ for every conceivable thing! Yet two consecutive Goverments -+the BMA do nothing about it! And they won’t-unless’the people’organise as much constant public pressure on them as we have about PRCs etc!! Wish Larry Birchall would do an article on THAT!