Opinion: Do Not Run And Borrow Money Again

[Opinion column written by Larry Burchall]

Don’t select a small temporary political and financial aim over a much bigger long term national requirement. A band-aid over a cure. Politics over arithmetic.

Scuttling back to the money markets in 2016 will rapidly create a disastrous long term national consequence.

One from which Bermuda, like Jamaica, will see no real recovery.

Fresh new need

This suddenly perceived need to scuttle back to the lending trough is being driven by the fresh new requirement to underwrite America’s Cup activities. The Minister needs to calculate carefully whether the possible potential net benefit from AC2017 will materially outstrip the longterm disadvantages of a possible 2016 Credit Rating downgrade.

That first 2016 downgrade will couple with increasing interest rates on the $90m [in 2016] and $180m [in 2019] and later $1.915bn rollovers that this new borrow decision makes inevitable. And remember that Bermuda faces four more Credit Reviews after 2016 and before 2020.

Current situation

Bermuda has a current Debt pile of $2.185bn. By simultaneously cutting costs and growing the economy, Bermuda can deal with that Debt pile.

By 2020, Bermuda can reduce that Debt pile to $1.915bn. Bermuda cannot get that Debt any lower than that until Bermuda’s GDP gets up to and past $8.0bn. GDP at $8.0bn allows Bermuda to start having surpluses that will enable Bermuda to commence repaying the four big bond bundles sitting out there [$500m/2020; $140m/2022; $475m/2023; $800m/2024].

If we can manage our existing Debt, even after the inevitable post-2020 interest rate rises, then basic Nanci [Debt Service Cost] will still likely creep up to something around $175m to $195m. Add that KEMH payment and we should be able to contain full Nanci at something around $205m to $225m.

Consequence of more borrowing in 2016

If Bob capitulates and rushes to an ‘emergency’ borrow in 2016, then Bermuda will inadvertently commit to four more years [2016/17, 2017/18, 2018/19, 2019/20] of deficit spending. Consequently, the possible ‘low’ of $1.915bn will grow significantly larger.

Instead of $1.915bn by 2020, there will be $2.5bn to $2.7bn [or even higher] in a combination of old Debt [up to December 2013] and fresh Debt [after 2016]. This, because of a net $585m/$685m added between March 2016 and July 2020.

That much higher debt level will combine with a definite increase in the interest rate demanded for Bermuda bonds which, because of Credit Rating Agency downgrades, will have been dropped to “B” or even “C” grades (* See later). That will mean basic interest rates around 10% or higher.

Add the 2.5% Sinking Fund Contribution. Bermuda will find itself paying a total of $315m/$335m each year just on Interest and Sinking Fund on $2.5bn/$2.7bn. Adding KEMH takes it up to $345m/$365m a year.

That is over $120m higher than the $225 to $235m that is achievable if we can avoid those four deficit years and contain Nanci. That is $180m more and over TWICE as many dollars as now – in February 2015 – when we are priority feeding Nanci with $161m which is a high 18% of our 2014/15 Revenue.

If – God forbid, but increasingly likely – revenue gets stuck under or around $1.2bn because GDP is still sitting under or around $7.0bn [by 2020]; then 29% to 30% [or higher] of that revenue will have to be used to priority feed Nanci.

National impact of more borrowing in 2016

Bermuda’s economy will quickly degrade into a ‘basket case economy’. Revenue too small. Nanci far too big and still growing!

That will be the situation. It will happen because there will be too little revenue while Debt will still be growing.

Succinctly and precisely, if Bermuda makes an ‘emergency’ borrow in 2016, then, helped by Credit Rating downgrades, Bermuda will dump itself into a rising Debt situation from which – like Jamaica – Bermuda will not recover. [Jamaica has been trying to climb out of its Debt trap since the 1970’s. Over forty years ago!]

Bermuda must not make the grand strategic error of borrowing now to get through what just a few persons perceive as a political crisis. A political crisis created, in part, by a failure to cut deep enough, soon enough; and to fully explain the whole situation.

One of the political and social consequences from that past avoidance of hard decision making was that marching through the streets of Hamilton between 26th and 28th January 2015, and that shouting and boo-ing at Government Ministers.

It will be worse if, to take the temporary ‘heat’ off now, we go back to the money markets in 2016.

Scuttling back as early as 2016 is a short-term tactical and temporary emergency band-aid fix that hopes to achieve the short-term political advantage of not cutting spending any further; and funding an operation whose net ‘return on operations’ probably will not justify the acceptance of what will be a huge and longterm rise in Nanci.

A direct result of borrowing so soon will be that there will be a near-term – 2016 and beyond – strategic impact in the form of a massive rise in Nanci that will certainly and ultimately hit hard and harder with each of the rollovers of the big bond bundles of 2020, 2022, 2023, and 2024.

Credit rating issues [* See earlier]

The first signs of interest rates rising will appear in the interest rate charged for the 2016 borrow. The second will be in the downgrading of Bermuda’s national credit rating between 2016 and 2020 .

In 2012, Credit Rating Agency Fitch downgraded Japan from AA to A+, dropping that 127 million population $5 trillion GDP country two grades lower in one review. In the same year, Fitch downgraded 47 million population $1.4 trillion GDP Spain from A to BBB, dropping Spain three grades lower in one review.

With 60,000 population, $5.6 billion GDP, and currently a maximum of three grades above “B” territory, Bermuda should not consider itself immune to that kind of downgrade treatment.

Minister, do not borrow in 2016! Do not take that futile fugitive’s run.

Communicating with the public

On the very few occasions when public communication has been genuinely attempted, the quality of that communication about Bermuda’s economic situation has been abysmally handled. This is a serious and consistent fault that runs throughout this whole half-decade problem.

If the broad public is uninformed, ill-informed, mis-informed, and even dis-informed – how can anyone even begin to understand Bermuda’s real economic situation. How?

That’s the big picture – the strategic overview.

The fix?

Start by breaking mind-sets, changing habits, discarding ancient tradition, and thinking clearly about the aim and the future.

What, exactly, is the overarching aim? Grow Bermuda’s economy!

Bermuda’s economy must grow large enough to support Nanci without further spending cuts or borrowing.

That must be, and it is, the only thing that EVERYBODY must see and agree. After that, problem fixing gets easier. Grow Bermuda’s economy!

Immediate Actions

Minister Richards, present your traditional twelve month Budget. However, tell the House and all Bermuda that you will exercise and authorise your April 1st 2015 ‘warrant’ for just six months.

Use the period between 1st April and 30th September 2015 to educate, inform, and in all ways get everyone – your fellow Ministers included – to understand and see exactly what is and is not happening.

Let all Bermuda know that right now and in the near future, more cuts must come – AND WHY!

That spending must be lower than in past years – AND WHY!

That Bermuda must grow GDP, thus revenue – AND WHY AND HOW!

Then, on 1st October 2015, issue a new ‘warrant’ and put a fresh new spending plan in place that will take Bermuda forward.

Arithmetic, not politics

Minister, Bermuda faces an arithmetic problem. Though politicians have to fix it, it is not a political problem.

Minister, do not try to fix this arithmetic problem with the emergency political solution that you propose. Politics and arithmetic do not mix.

- Larry Burchall

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