Opinion: Win? Lose? Bermuda Races The Raters

February 3, 2015

[Opinion column written by Larry Burchall]

There’s an invisible race on. But nothing to do with the America’s Cup. It is as simple as the 100 metre race that Usain ‘Lightning’ Bolt owns.

By 2020, Bermuda’s sovereign credit rating either finishes above “B” grade, or it does not. It is that simple.

The Government and Union Friday to Wednesday kerfuffle has combined with Minister for Finance Bob Richards’ assertion on 26th January.

Bob’s statement that he was going back to the money markets before March 31st 2016 means that Bermuda has jumped out of the starting blocks. Bermuda is now sprinting.

This sprint is between Bermuda’s sovereign credit ratings as decided by the Credit Rating Agencies [Standard & Poor’s, Moody’s, Fitch] and happenings within Bermuda’s national economy.

What are the ratings?

The grading systems of the three agencies differ in detail, but all three use A, B, and C designations.

Any “A” grading means that the borrower’s financial strength is such that their bonds and notes can be considered as safe investments with a very low risk of default or other problem. “A” bonds pay the lowest interest rates.

Moody’s grades from “Baa1” to “Baa3” mean that the borrower’s financial strength is such that their bonds can be considered as relatively safe investments or holdings. However, compared to “A” bonds, there is an increased degree of risk of default or other problem. All “B” bonds pay an interest rate higher than “A” bonds.

Moody’s “Ba1” down to “C” grading, mean that the borrower’s financial strength is dubious. Consequently, their bonds carry a high degree of risk of default or other problem. Often referred to as ‘junk bonds’, these pay interest rates higher than “Baa” bonds and much higher than “A” bonds. Credit card level rates of 12% and up are common.

Loosely:- A = Safe, sound. B = Should be safe, but keep an eye on it. C = ‘Caveat emptor’ [Let the buyer beware].

In February 2015, how is Bermuda’s ‘Sovereign Debt’ rated?

In 2014, Moody’s rated Bermuda’s Sovereign [National] Debt at “A1”. That was DOWN from Moody’s 2013 rating of “Aa3”.

Moody’s has only two levels below “A1”. Moody’s has “A2” and “A3”. After “A3”, Moody’s goes into “B” grades.

S&P and Fitch follow the same pattern. These agencies have moved Bermuda within two [Fitch] and three [S&P] steps of their “B” territory. All three must report – and rate – again in 2015.

Moody’s issued a Bermuda report [not yet released by Government] on December 14th 2014. So Moody’s people have probably already made their 2015 decision. S&P and Fitch will make the next two sets of decisions. These other decisions should come by May 2015.

On Monday 26th January, Bob intimated that so much of that borrowed $800 million has already gone, that he thinks he will go back to the market before 31st March 2016. That’s a whole year before I’d predicted that Bob [or someone else] would face that kind of decision. [See Bernews 7th January 2015.] And Bermuda must still deal with the total $270 million due for repayment between May and November 2016 [$90m] and May and November 2019 [$180m].

Here are the race conditions.

Condition ONE:- In consecutive Financial Year’s [FY’s] 2017/18, 2018/19, and 2019/20, Bermuda must have ‘break-even Budgets’ or small [$25 - $30m] ‘Budget surpluses’; and by November 2019, Bermuda must pay off that $90 million + $180 million without further borrowing.

Condition TWO:- Sometime between now and April 1st 2017, Bermuda borrows $400 million[*] in order to get through three more deficit budgets in FY’s 2017/18, 2018/19, and 2019/20 as well as pay off the $90 million due in 2016 and the $180 million due in 2019.

For the Government of Bermuda, the race is that clear. That simple.

Condition ONE requires GDP growth around 8% net year-on-year between now and April 2017. [See Bernews: 12 January 2015.]

Condition ONE also requires combining that 8% net GDP growth with severe Government cost-cutting. That combination will enable the NEXT Government [remember, there will be an election by December 2017] to create the first balanced budget – in FY 2017/18 – followed, consecutively, by two more balanced budgets [FY’s 2018/19 and 2019/20].

By April 2020, in 2015, 2016, 2017, 2018, 2019, and early 2020, there will be six more credit rating decisions. If Bermuda can achieve Condition ONE, then Bermuda stands the best chance of not being degraded to “B” or “C” grading and of climbing out of the Debt trap.

However, Bob’s January 26th 2015 admission that he’ll be going back to the markets before March 31st 2016, tells me that he thinks that Bermuda is unlikely to achieve Condition ONE. Further, and as a consequence of likely rating agency downgrades, Bermuda is highly likely to see a material increase in its borrowing costs when he takes Bermuda back to the money markets before March 31st 2016.

Condition ONE not met? Then Condition TWO will apply.

Condition TWO means degrading into “B” or even “C” territory and borrowing $400 million[*] or more. The consequential higher interest rates and pre-set Sinking Fund contributions will immediately add at least $40 million [net] a year to Nanci. This will push Nanci over $235 million a year in the year of borrowing.

With Nanci over $235 and heading inevitably higher, with GDP not ramping up at 8% or better, Bermuda’s economy WILL, not may, WILL implode. The implosion WILL begin in the year of borrowing.

Stay in “A”, or degrade into “B” and “C” territory. Borrow, or no borrow. Either, or. Fix, fail.

Unless you live in “Cloud Cuckooland”, there is no in-between.

– Larry Burchall

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Comments (15)

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  1. RatingAgencies says:

    Weren’t those same agencies guilty of incorrectly assessing credit grades to those banks that were bailed out from the Great Recession? What would make them so credible now?

    • LiarLiar says:

      Doesn’t matter whether you think they are credible or not.

      You are not lending billions to Bermuda.

      The market, however, which has now bailed out Bermuda for some years now do pay attention to the rating agencies and if we are downgraded (which will happen) then our debt costs move from $120mn to much higher as indicated by Mr. Burchall. Sorry, you can’t march and shout at the rating agencies when they do the inevitable, because in all honesty they don’t care about your emotions and only consider cold hard facts.

      Last month Barbados was downgraded and as such a local insurance company that has been domiciled in that island for 170 years has to move because the rating agencies rules state that a rated institution cannot reside in a jurisdiction whose rating is less than the firm’s.

      So despite your feelings the people who fund Bermuda do care about the rating agencies.

      • BETTTYTRUMP says:

        BERMUDA RATINGS HAVE DROPPED 4 TIMES UNDER THE OBA GOVERNMENT……WOW……the race is still on…

        But NO NO Solutions or a Recovery Plan from the OBA …

        Bermuda’debt race is a serious one yet OBA HAS no answers and seem to be lacking the intellectual Capital to address it, except their fail strategy of playing “Blame it on the PLP” Game. …really…..

        OBA falling on their swords unless they make a right move on the Chess board. .

        • fedup says:

          “Bermuda’debt race is a serious one yet OBA HAS no answers and seem to be lacking the intellectual Capital to address it, except their fail strategy of playing “Blame it on the PLP” Game. …really…..”

          Betty, you have absolutely no intellectual capital to comment on this. your beloved PLP screwed Bermuda to the wall and all you can do is blame the current government for it. This really paints you as an intellectually dishonest hypocrite.What ideas do you have to bail Bermuda out of the mess the PLP put the island in? Other than sitting on you butt and complaining?

      • RatingAgencies says:

        I disagree, credit rating agencies are not infallible. Case in point: S&P’s downgrade of Russia to junk status.

        S&P’s main justification for downgrading Russia to ‘BB+’ – its highest non-investment grade – was the country’s newfound lack of access to international capital markets. The implicit message there is that, in the not-too-distant future, Russia simply will not be able to service its debt obligations.

        The widely used metric of public debt as a percentage of GDP is seen as a broadly reliable indicator of a country’s level of indebtedness.
        Low debt to GDP ratio
        High revenue to debt ratio,high reserves to debt ratio

  2. stunned... says:

    i’d say to Mr. richards – “No more borrowing this year”. we need to feel the pain and cut our suit to match our cloth. no more carte blanch funding of civil servants at their no furlough day salaries, no. scale back to bare essentials, no overtime but time in lieu, collectively Bermuda needs to go on a financial diet and yes for a couple of months it will be uncomfortable but eventually we’ll learn how to DO more with less.

    • Unbelievable says:

      Can you imagine if The OBA Govt didn’t borrow any money this year? The PLP would be all over that like I don’t know what. They’d spin that to the high heavens.

      And if the Govt does borrow, (which they will) the PLP will STILL be all over that. See already how none of it makes sense?

  3. Triangle Drifter says:

    Larry Burchall is gifted with the ability to lay out some very complicated financial stuff in an orderly easy to understand manner.

    I am one of those who appreciates that gift.

    However there are many who don’t have a hope of understanding. Worse, there are those who don’t want to understand. As long as their little world is OK nothing else matters. The financial damage done to Bermuda is way beyond their comprehension & therefore does not exist now matter how well Larry Burchall explains it.

  4. Kangoocar says:

    The first act in Parliament when it reconvenes needs to be the Passgage of a LAW that states, ALL leaders of the unions in Bermuda need to be sat down on the lawn of the Cabinet building and invite all 5000 unions members that they called out last week to the very same venue, ( even those that were caught drinking in the Front Street bars ? ) and each lunion leader be made to read this Larry Burchall OUT LOUD to everyone one of their members!!!! And keep reading it over and over until it sinks into their heads!!!
    I always find it interesting the lack of the usual plp/union talking heads that comment on the Larry Burchall articles???
    I am at the point of I don’t care anymore ( after witnessing last weeks union nonsense, and we all know the plp were equally behind it, but public ally stayed silent ?? ) I have made my money and will leave before the inescable collapse of everything in BDA thanks to the plp/ unions if we can’t come together and head off this looming disaster!!! I just feel sorry for my innocent employees that rely on me to feed their families and those that can’t leave!!!! Sad really!!!!

  5. BackToEquity says:

    Good Capt.Kangaroo….run off somewhere like Australia.. We can go back to 60′s, 70′s tourism and less IB…real estate prices will come down and we can be rid of persons of your ilk. Hopefully for you, that currency you’ve made won’t depreciate considerably like the swiss franc, when the Swiss National Bank lost control, breaking a promise, and a currency peg, losing an amount of money equal to somewhere between 10% and 15% of Swiss GDP in a single day.

    Please let this sink in: a central bank lost control. This will not be a one-off event. With the Fed and other central banks now leveraged well above 50-to-1, even those entities that were backstopping an insolvent financial system are themselves insolvent.
    The self-same folks whom currently provide Bermuda that debt-based lending from a central banker driven inflated economic mechanism.
    So your fear mongering falls on deaf ears. There should be no credibility for central banking left after the massive losses the bastion of banking took when they unpegged.

  6. BackToEquity says:

    OK..Capt. Kangaroo. Good riddance to you and those of your ilk. Maybe we need a bit of a reset. Back to good ole tourism. We still have a first class product. Less IB? A blissing. Maybe real estate will fall to equitable levels. When you leave to, maybe Australia, hopefully your hardearned currency doesn’t take a hit like the swiss franc recently when the Swiss National Bank lost control, breaking a promise, and a currency peg, losing an amount of money equal to somewhere between 10% and 15% of Swiss GDP in a single day.

    Please let this sink in: a central bank lost control. This will not be a one-off event. With the Fed and other central banks now leveraged well above 50-to-1, even those entities that were backstopping an insolvent financial system are themselves insolvent. The self same entities whom Bermuda Inc looks to for debt-based lending. There should be no credibility for central banking left after the massive losses the bastion of banking took when they unpegged. It is on borrowed time.

    So your fearmongering falls on deaf ears.

  7. RatingAgencies says:

    I disagree, credit rating agencies are not infallible. Case in point: S&P’s downgrade of Russia to junk status.

    S&P’s main justification for downgrading Russia to ‘BB+’ – its highest non-investment grade – was the country’s newfound lack of access to international capital markets. The implicit message there is that, in the not-too-distant future, Russia simply will not be able to service its debt obligations.

    The widely used metric of public debt as a percentage of GDP is seen as a broadly reliable indicator of a country’s level of indebtedness. Russia has low debt to GDP ratio, high revenue to debt ratio,high reserves to debt ratio. Russia’s debt as % of GDP- 9%. U.S, Germany and the U.K. respectively; 74%, 76.9%, 79.5%.
    Bottom line, rating agencies are not the end all be all.

  8. bluebird says:

    Now lets see,
    We have in Bermuda according to reports 3,000 un or under-employed.
    We have in Bermuda Govt/Quango on the payroll of 8,000 at a cost of
    $750Million or more.
    We have in Bermuda according to reports 11,300 work permits.
    We have in Bermuda a Government that is wasting $50Million on financial assistance.
    Government has to “CUT”3,000 from the Government payroll to save $300Million per year on the payroll and BALANCE the Budget,before starting to pay off the DEBT.
    NOW AM I MISSING SOMERTHING HERE ???????????????????????????????

  9. bluebird says:

    Where are the jobs for Bermudians ??????????????
    Where are the Bermudians for the 11,300 jobs that we import expats to do ???????????????????????????????????????????????????????

  10. bluebird says:

    OH DEAR,now what would happen to those 3,000 now un-employed Government workers ??????
    The same as the 3,000 un-employed private enterprize workers.
    They would be UN-EMPLOYED” and we could save $300MILLIOM Dollars per year to balance the BUDGET,before we start to pay off the $2Billion DEBT.
    And we have OVER-EMPLOYMENT of 11,300 work permits jobs.
    A policy of you don’t work you don’t eat would work well like in the OLD DAYS that I remember.