Column: Loan Is ‘Major Financial, Political Event’

July 17, 2015

[Opinion column written by Larry Burchall]

That $200 million Loan Facility that the Minister for Finance announced today is a major financial and political event. It is also a slick way to fix a short-term dilemma without having any impact on the mid-term problem and does absolutely nothing about the long-term situation.

What, exactly, are the financial mechanics and background involved in this just announced Bd$200,000,000 two year Loan Facility?

One – It is not a new set of Bonds or Notes. Instead, it is an agreement with the Lender that the Borrower can have up to $200 million of the Lender’s money with the Borrower taking up the money on an ‘as needed basis’. So Government does not actually have $200 million fresh new dollars in its fast-emptying coffers the way it would if the Government had issued $200 million in Bonds or Notes. But Government can now access up to $200 million over the next two years. [It’s similar to a two-year Overdraft.]

Two – As the Minister reports, Gross Debt is currently at $2,185 million with a 5.119% average interest cost per year. When fully taken up, this $200 million Loan Facility will increase Gross Debt by $200 million taking it up to $2,385 million; which will be just $115 million under the existing $2,500 million debt Ceiling.

Three – The interest paid on the $200 million Loan Facility will be 4.75%. When it is fully taken up, the effect will be to slightly lower the average interest cost to an average 5.09% per year.

Four – By using a local agreement with a local bank, the Minister has neatly side-stepped the issue of having to go ‘foreign’ and thus involve the two Credit rating agencies who report on us [S&P and Moody’s]. By side-stepping the Rating agencies, the Minister postpones – but does not avoid – the ‘day of reckoning’ when Bermuda must return to foreign capital markets. The Minister has pushed that return forward, to a date in 2017.

Five – On June 12, 2009, the Government of Bermuda helped to bail out the Bank of Butterfield by putting in a $200 million Preference shares guarantee. In 2015, Butterfield Bank has been a good corporate citizen and has returned the favour, at the same $200 million value.

Six – In today’s statement, the Minister indicates that he foresees paying-off the $90 million due in May/November 2016 from current borrowings and cash-in-hand. He says he will pay-off the $200 million from the Sinking Fund [about $115 million total should go in on March 2016 and March 2017], and from Government ‘savings’ made between now and July 2017. However, the Minister also suggests that the $200 million from NTB may be ‘re-financed’ in 2017 – which means that the $200 million might not be paid off at all; and Gross Debt will be stuck at the higher $2,385 million in July 2017.

Seven –Today’s borrowing action coupled with the known use of that $200 million means that this Administration intends to continue the unbroken pattern of material overspending that commenced in 2004.

Eight – There must be a General Election by or in December 2017. This next General Election will be started and fought under two big financial questions – the matter that I’ve been hammering away at since 2010. The two key Election Questions will be: “Will Bermuda continue overspending and go back borrowing again as soon as the Election is over? Or will Bermuda cut its expenses to meet its revenue?”

Nine – While only us Bermudians can vote in the next General Election, the real decision as to ‘cut’ or ‘overspend’ will not be made by us. Instead, it will be made, either in 2017 or in 2018, by foreign lenders. It is then, and only then, that us lot will realize and recognize that we have surrendered our financial independence.

Ten – The first act in our actual surrender of our own financial independence will be traceable to today – because we did not grab this last, this very last, opportunity to demonstrate political will, exercise management muscle, and display strong fiscal discipline and prudence.

Whether you realize it or not, in the House of Assembly, the first salvo in the next General Election was fired around 1120hrs today.

- Larry Burchall

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Comments (25)

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  1. Cow Polly says:

    Greece springs to mind!

    • So SpoongeBob burrows $800 million to take us too 3 years and then says its not enough after two years after taking a gamble on paying a low interest rate which backfired on him and now has to burrow another $200 million for his Fuzziness.
      What a F!@#ing JOKE.

      • Zevon says:

        Unfortunately it’s to pay the public employees to take 70 days sick a year plus 33 days vacation in their guaranteed jobs. While the rest of us, the idiots who are paying for all this, actually have to work to keep employed.
        But any time anyone suggests cutting spending we know what happens next.
        LMFAO.

  2. Lois Frederick says:

    Larry – What would be your first recommendation of what to cut? Easier said than done.

    • San George says:

      Cut government’s subsidy of rents. Subsidies are preventing rents and home prices from declining to where they should be.
      Cut the government’s use of their own trucking fleet – have you seen all those brand spanking new W&E trucks? Government is competing with truckers who are taking business risk. Hire trucks when needed.
      The targets for cutting government spending are huge – Dunkley might see some of them if he stops walking around with Jeff Baron.

    • Frank says:

      The Sage Commission has made many recommendations that can be implemented but i am sure most Bermudians do not want it alike the Greeks! No money is no money!

  3. In layman’s term Mr. Larry Burchall, “you’ve hit the proverbial nail upon its head.” Though I do give credit to the Finance Minister, Bob Richards on the approach he has taken in securing an additional 200 million dollars as a “nest egg” and tentatively saving our credit rating with agencies who report on us [S&P and Moody’s].

  4. serengeti says:

    We surrendered our financial independence during the years 2006-2012. By the time those years had gone by, children’s and grandchildren’s futures had been sold to foreign bankers.

    What can we do about it Larry? Every time a suggestion comes up to save money, even if it’s to save $0.25m here and there, the opposition organizes a march or a strike, or a mob occupies the Senate, or whatever. There is no willingness on the part of the opposition to do anything at all to help the country.

    If taxes are raised, our economy will dramatically shrink in size. Like it did when Paula Cox tried raising Payroll Tax. So that won’t work.

    There is no alternative but to spend less than we make. At some point, even the PLP will have to admit it.

  5. swing voter says:

    no different than Greece. inflated cost of living, inflated cost of doing business, and inflated cost of services for our clients (tourists & IB) that have other less costly options to consider. Now put the ‘entitlement’ attitude, inept politicians, and foreign ownership of our banks in the mix and we’re got a perfect storm brewing.

  6. Vincent Vega says:

    When $800 million was borrowed in 2013, it was supposed to last through to FY 2016/17. Now we need another $200 million for FY 2015/16 and only a portion of 2016/17?

    Can we please get a full picture of what went wrong versus original estimates?

  7. UmJustSaying says:

    Questions
    1. What is the plan to get the Bermuda out of dept?
    2. Will we continue to give Police, Fire and Prison Services
    100% medical coverage at the tax payers expense?
    3. When will we hold those accountable for the public purse
    responsible?
    4. Why do we allow Ministers to express their personal opinons
    when addressing public issues.

  8. Alvin Williams says:

    One thing if Bermuda does go the way of Greece? We will than see who really wants to be a Bermudian and whose birthright is really something of value for those who are left will have to suck it up.

    • justin says:

      With that being said, what’s your view on independence Alvin? Only possessing a Bermudian passport when everyone is heading towards the exit will put you in an interesting situation…

    • Ringmaster says:

      Birthright will make no difference at all. Those with the so called “birthright” will be in the same line to board a plane as any one else. Very few Bermudians hold only a Bermuda passport so they will relocate just like the expats. The ones left will be holding the salt rakes, fishing lines and forks to eke out a subsistence life.

      • jt says:

        And they will have no government pension Alvin.

  9. Need Peace says:

    I say the government needs to suck it up and offer up those huge salaries! It will serve to get us a little closer to the mark!!!

  10. Jeremy Deacon says:

    Larry’s penultimate paragraph is right: “The first act in our actual surrender of our own financial independence will be traceable to today – because we did not grab this last, this very last, opportunity to demonstrate political will, exercise management muscle, and display strong fiscal discipline and prudence.”

    Personally, half way through an election cycle I cannot see Govt doing any of the above. The time for that was 18 months ago…..

    • Zevon says:

      But it isn’t traceable to today. It’s traceable to the Brown/ Cox freakshow of borrowing like idiots and spending on themselves.

  11. Chris Famous says:

    A good start would be to relocate government offices out of the private sector and into government owned real estate

    We pay near $13 million per year for this.

    • jt says:

      I agree…a good start…much more is needed though so tell us more….

    • Zevon says:

      Oh right. And the first time we move a government department into cheaper but less nice, less convenient, less suitable space, you will be at the front of the march complaining about how the ‘workers rights have been trampled on’ or whatever.

    • frank says:

      that would be a good start

  12. Jus' Askin' says:

    Election 2017 will be the most Intense Election in Our History :-D

  13. jt says:

    Unfortunately the election issues mentioned will take a back seat to the usual crap.